The DIR Act authorised the amalgamation of New Zealand's two largest dairy co-operatives - New Zealand Co-operative Dairy Company Ltd and Kiwi Co-operative Dairies Ltd - into Fonterra Co-operative Group Limited (Fonterra) and the resulting ownership by Fonterra of all the shares in the New Zealand Dairy Board.
As this resulted in an entity with a substantial degree of market power in a number of key domestic New Zealand dairy markets, the DIR Act was designed and implemented to mitigate the risks of Fonterra's market power. The DIR Act allows for contestability in the New Zealand raw milk market and provides for access to other dairy goods or services supplied by Fonterra to be regulated if necessary. This contestability and access is provided under Subpart 5 of Part 2 of the DIR Act by:
legislating open entry to and exit from Fonterra by farmers;
- allowing shareholders to supply 20 percent of their weekly production to an independent processor;
- ensuring that, at any time, at least 33 percent of the milksolids produced within a 160 kilometre radius of any point in New Zealand is supplied either under contracts with an independent processor, or under contracts with Fonterra that expire (or may be terminated without penalty) at the end of the current season;
- ensuring that Fonterra sells at market value to exiting shareholders any milk vat situated on their farm, when requested by those shareholders;
- preventing discrimination between new entrants and existing shareholders; and
- providing for the regulation of dairy markets and imposing obligations on Fonterrato disclose certain information. To date, only regulations relating to raw milk only have been introduced (Dairy Industry (Raw Milk) Regulations 2001).
When the Minister is satisfied that independent processors collect 20% or more of milk solids in a season in either island, this will trigger:
(a) a competition review of the dairy industry in that island;
(b) Subpart 5 ceasing to apply to that island; and
(c) consideration by the Minister of whether the market share threshold should be reset or alternative regulation adopted.
Any regulations made under section 115 or 116 (excluding any levy regulations) are revoked when subpart 5 expires.
The Commission has both an enforcement and adjudication role under Subpart 5 of Part 2 of DIR Act. The Commission's role under Subpart 5 of Part 2 of the DIR Act is limited to dealing with issues relating to specific provisions and does not extend to general disputes between Fonterra and shareholders.
The Commission's role in the dairy industry covers the full range of investigation, enforcement and litigation activities to enforce the Commerce and Fair Trading Acts within the dairy industry.
For a full copy of the Dairy Industry Restructuring Act see the New Zealand legislation website.
One of the most important provisions in the Dairy Industry Restructuring Act (DIR Act) is the obligation on Fonterra in terms of the entry and exit of farmers to and from Fonterra.
Under the Dairy Industry Restructuring (Raw Milk) Regulations 2001, Fonterra may require from each independent processor estimates of the quantity of milk that the processor wants to purchase.
The Commission draws on its experience in conducting investigations and making adjudication decisions under other legislation, when undertaking its role under the Dairy Industry Restructuring Act.