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NEW ZEALAND GAZETTE

No. 90

A regulatory package that enhances the performance of the dairy industry and the economy is outlined below. The Government has introduced legislation on matters relating to taxation, regulatory, industry good and quota issues. Issues relating to competition within New Zealand markets are for the Commerce Commission to decide.

Key Features of Reform

Changes to legislation are required to achieve the overall goals of the Government and the dairy industry. The Government will:

• Provide arrangements for markets where foreign governments exercise a high degree of control over the economic terms of access to their domestic markets. These arrangements will maximise benefits to New Zealand dairy farmers while phasing out barriers to competition in the export of dairy produce from New Zealand over time;
• Ensure competitive neutrality in the regulatory environment:
  • Through a review of all aspects of the regulatory regime associated with the dairy industry to remove and/or reduce regulatory barriers to entry; and
  • By providing for non-discriminatory access for all market participants where any regulatory functions are undertaken by the industry;
• Ensure the Commerce Act applies to domestic markets without exception; and
• Remove the statutory powers providing for a single exporter for New Zealand dairy products.

The Government considers the dairy industry must ensure that effective and efficient corporate governance arrangements are in place, including:

• Adequate commercial, including appropriate capital market, disciplines;
• Mobility of capital, which would include efficient price signals to shareholders and/or suppliers;
• Adequate protection of the interests of all shareholders;
• The separation of commercial and non-commercial activities in a manner that improves the accountability and transparency of operations; and
• Clearly defined end points for any transitional arrangements.

In general, the Government sees full tradability of shares (not linked to supply) in large commercial entities as conducive to effective corporate governance and efficient resource allocation.

While co-operative companies, where shareholding is fully tied to supply, have been a feature of the dairy industry for many years, the new co-op is expected to provide a reasonable degree of tradability.

To the extent that shares in the new co-op are not tradable, provision in the initial constitution of the new co-op for shareholders to enter and exit at fair value in a timely manner is important to the creation of effective corporate governance, efficient resource allocation and a competitive environment in all relevant markets.

“Fair value” in this context and at this stage in the dairy industry’s development, means the value that would be expected if:

• The shares were tradable among supplying shareholders on a willing buyer and willing seller basis in an arm’s length transaction;

• The earnings attributable to equity were fully unbundled and delinked from the milk price and distributed to shareholders as dividends or are reflected in the exit value; and

• The duty of directors is to maximise the earnings attributable to equity given the separation of a milk price which approximates that which would be paid in a competitive market.

For both trading among suppliers or the redemption of shares at fair value, it is essential that the rules for separation of earnings attributable to equity from the milk price be objective, independently managed and transparent. The Government expects an increase in the degree of tradability and unbundling of returns to be a feature of the transition to a more responsive structure to external factors.

Policies to be Implemented in Legislation

Specific features of the legislation introduced, include:

1. The removal of the statutory powers providing for a single exporter for New Zealand dairy products with effect from 1 September 2000, conditional on:

• An amalgamation of two or more co-operative dairy companies under Part XIII of the Companies Act 1993; and
• The amalgamated firm being the beneficial owner of more than 75 percent of the shares in the Dairy Board; and
• The amalgamation being authorised by the Commerce Commission.

This will be achieved by:

• The repeal of the Dairy Board Act 1961; and
• The repeal, without replacement, of all existing Commerce Act exemptions in the Dairy Board Act 1961; and
• The conversion of the New Zealand Dairy Board to a company under the Companies Act 1993 using the provisions in Part II of the Fifth Schedule of the Dairy Board Act 1961.

2. Arrangements for designated markets as follows:

• Designated markets are defined as:

  • The European Community “country specific tariff quota” markets for butter, cheddar cheese and cheese for processing;
  • The United States markets for cheddar cheese, low-fat cheese, NSPF cheese, and other American type cheese;
  • The Canadian market for butter;
  • The Japanese market for prepared edible fat and natural cheese; and
  • The Dominican Republic market for milk powder.

• The new co-op is granted the exclusive right to export to those markets for between 6 years and 6 and a half years (depending on when the relevant quota year ends);

• The new co-op is granted further rights to export to those markets for a transitional period during which:

  • The exclusive rights to the European Community markets are reduced by 25 percent each year; and
  • The exclusive rights to other designated markets will be reduced on a basis to be determined by a new quota allocation company;

• The new quota allocation company will be established by regulation and its shares will be owned by supplying shareholders in existing dairy co-operative companies;