DIRA

DIRA, oh dira.


Farmer Freddy is all-a-flutter.

This Friday is the deadline for submissions on the Ministry of Agriculture and Forestry's review of competition regulation in the dairy industry. Freddy has been feverishly flaying the keyboard (one finger at a time) finishing his submission. He emerges from his study to find his daughter Pebbles and her boyfriend Bambam sitting down to dinner.

"Where have you been, Dad?" ask Pebbles. "You look like you need a drink."

"Just injecting some common sense into a hare-brained scheme to ruin the dairy industry," replies Freddy

"Oh, you've been working on your submission again" says Pebbles. "Well, you should talk to Bambam - his thesis looks at the Dairy Industry Restructuring Act (DIRA). What do you think, Bambam?"

Bambam - conscious of the need to steer a path between the risks of getting off-side with his girlfriend and arguing with his possible father-in-law - pauses for a moment.

"Well, obviously DIRA was about allowing the dairy co-ops to merge to form Fonterra but to prevent it from being able to abuse its dominant market position. The aim was to protect farmers (so they could choose who to supply), independent processors (so they could access raw milk at a fair price) and, ultimately, consumers (so there was competition in the dairy product market)."

"DIRA enables farmers to choose who they supply by making it easy for supplier-shareholders to start and stop supplying Fonterra. It must accept each application to become a shareholder and, if a supplier wishes to leave, it must redeem the supplier's shares at fair value (although this will change if trading among farmers is introduced)."

"Then, to protect farmers and independent processors, there's the 20 per cent rule - Fonterra must allow a shareholder to supply up to 20 per cent of their milk to another processor without having to leave Fonterra."

"And third, the Raw Milk Regulations force Fonterra to supply 5 per cent of the raw milk it collects to other processors, with the regulated price calculated using a formula in the regulations. These regulations aim to maintain competition among processors and to protect consumers by preventing Fonterra from having a monopoly over the domestic market," explains Bambam.

"Well thank you for DIRA 101, Mr Economist" says Freddy. "Perhaps you can tell me why the regulated price is below the price Fonterra pays its farmers so that Fonterra subsidises its competitors? And why I need protecting from the co-op I'm a shareholder in? And why the regulatory regime in DIRA, which was supposed to end when the sunset thresholds are triggered, now might continue?"

"Well ... obviously the formula in the regulations wasn't right, which is why the Government is looking to change it to farmgate milk price + 10c and, well maybe there is actually enough competition in the processor market already to protect suppliers, processors and consumers so DIRA can just expire ... maybe," says Bambam, his voice dropping away.  "Chicken" mutter Freddy and Pebbles together.

 

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