What is the Government doing with DIRA?

The Government has failed the people of New Zealand with their DIRA review.  This legislation is not about taxing those with surplus incomes and re-distributing it as a civic good, rather its better viewed for what it is; the Government sanctioned enforced re-distribution of assets from a group of NZ citizens to foreign owned companies. 

1.       Compensation does not reflect free market exchange

a.       Ability of private processors to drive down the milk price.

b.      Increased value of the raw milk for on-demand uptake.

c.       Inability for individual farmers to refuse consent to participate in the scheme if they feel compensation is inadequate.

2.       There is no civic duty aspect

a.       The purpose of the original DIRA regulations is not being met.

b.      Obligations do not reflect entitlements for participating in the scheme.

1.       Collective consent is tainted.

a.       Farmers could not have known how they would feel about corporate free-riders on the cooperative.

b.      The honour of NZ farmers as world leaders in the cooperative model is under threat.

The Raw Milk Regulations works on the premise of taking some milk from the larger processor and re-distributing it to some smaller processors who are less able to source the milk therefore enhancing the utility of the dairy industry as a whole within New Zealand.  This theory works on the assumption that the environment is of a larger processor dominating the NZ milk supply where smaller processors are trying to emerge to add competition at the farm-gate price and choices for farmers around who to supply.  This reasoning is flawed because it misunderstands the cooperative model.  The cooperative is actually individual farmers processing their own milk through a collective resource system, and are doing it in an organised way, creating the Fonterra organisation. This means that all farmers using Fonterra are in-fact still the legal owners of the milk and must bear the responsibilities and receive the rewards that ownership of the milk bestows.  The justness of this proposal critically hinges on whether compensation to farmers for their milk reflects a genuine free-market exchange, is any civic duty met and how untainted is original consent given by farmers to participate in DIRA.

Firstly I will explore the compensation to the NZ farmers for their raw milk (products of their time and labour) that is removed from them, and whether the farmers’ compensation reflects what would be achievable in a free market exchange. To investigate this we look at the farm-gate milk price.  It is important to note that the farm-gate milk price for a cooperative is set after the company knows what it has achieved from the market, not before which would be the case if this was a type of contractual supply to a company independent of the individual farmer’s business. This means that the success or failure of NZ milk supply must be born entirely by the suppliers, as owners of the product. Due to the mismatch in size between the domestic market and the domestic milk supply, the majority of the value for the milk produced in NZ comes from exporting it.  By farmers organising themselves into a way which, for the most part, creates a single point of sale from NZ enhances the profitability of the saleable product, and therefore the reward each farmer is able to achieve for their milk.  The emergence of private export processors, supported by the DIRA regulations, has seen this position as a single point of sale for NZ dairy products weakened.  This action has a negative effect on the farm-gate milk price, because as discussed before, the milk price is set after it is known what the market will pay, not before.  Farmers are now not able to maximise their income from the cross-boarder sale of milk due to increased competition coming from NZ and the decreased collective volumes available to sell. This means that private processors subsidized by DIRA can weaken the farm-gate price, the very price that determines the justness of the confiscated raw milk from individual farmers.  The farm-gate milk price now becomes inadequate to reason a fair exchange due to the superior ability of private processors to influence the market ahead of individual farmers.

The ability of private processors to choose when they take raw milk intrinsically increases the value of this raw milk to them, as it allows them to maximise their processing capacity for longer, maximising their profitability.  This further value added to the raw milk by the regulations is not reflected in the basic milk price alone; meaning the milk-price alone is not adequate compensation.  It is critical to ensure the compensation is fair as individual farmers do not actually have the freedom to refuse participation in the scheme if they do not feel compensation is just. 

The second aspect to this claim is whether the NZ public are benefiting from the redistribution of the raw milk and any civic responsibility is being met.  Part of the purpose for the DIRA regulations was to ensure that the NZ public would have adequate competition in the supermarket to keep dairy products affordable.  The success of this aspect cannot be accurately measured because despite the high level of uptake from new and established private processors, the majority of the milk is being exported rather than finding its way to the domestic market.  The reason for this is that the entitlements processors receive for accessing the Raw Milk scheme are not met with any obligations around promoting domestic competition, or to the NZ dairy industry as a whole.  The ability to receive entitlements without obligation is a gaping injustice in the scheme and one that encourages free-riding on the collective resource value of Fonterra to maximise profits for overseas investors.

The third aspect to this claim is how this lack of obligations and the consequential free-riding on the farmers’ collective resource system of Fonterra, taints the original collective consent the Fonterra farmers gave when the scheme was set up.  Farmers collectively entered into consent for the scheme to enable the formation of Fonterra, but would have been unable to know at the time that the scheme would not produce the originally consulted on outcomes and expose the cooperative to the free-riding on capital by private processors, and critically, how they would feel about this.  There is also the question of honorific value in forcibly removing the fruits of farmers’ time and labour.  Farmers have worked for a number of generations to increase the strength of the cooperative model and are proud of their position in New Zealand and on the world stage as an example of the power of the cooperative model.  The DIRA scheme undermines this honour and sends a message to the NZ public that the government does not value individual producers of export products working collectively to take on larger and better geographically positioned countries successfully.

This scheme amounts to nothing more than a re-distribution of income and wealth away from NZ farmers to overseas based investors.  It empowers private processors to free-ride on the cooperative model for their own ends.  This behaviour does not support or enhance the purpose of the original legislation and does not add to the civic good.  The lack of obligations attached to the entitlements seriously erodes the fairness of the scheme.  Tainted consent and the derogation of fair compensation coupled with the lack of freedom for individual farmers to refuse participation in the scheme makes the scheme unjust to those it was intended to protect; the NZ farmer and the NZ public.

As minimum measures to protect the NZ farmer and the NZ public we believe that the following actions are the least the government can take to ensure a basic level of justice is restored.

• ·         Limit the number of years a private processor can access the scheme.
• ·         Remove virtual processors.
• ·         Failure to uptake one month should constitute withdrawing from the scheme for that season.
• ·         Introduce some form of obligation to the NZ domestic market for those that access the scheme, at least while they are in the scheme.