The Commission is responsible for enforcing the legislation and issuing determinations to resolve disputes any party might have with Fonterra in relation to these entry and exit provisions.
Entry
Application period
Fonterra is required to specify a period when it will accept applications from new entrants to commence or shareholders to increase supply for the next season or notifications from shareholders to cease or decrease supply for the next season. This specified period is called the "application period", and must at least extend from 15 December to 28 February inclusive for each season.
A new entrant or a shareholder may apply or give notification at any other time (outside an application period) but the DIR Act does not require Fonterra to accept such an application or notification.
Fonterra must accept supply
Generally, Fonterra must accept supply from any new entrant who applies to become a shareholder, or any existing shareholder who applies to increase supply if those applications are made during the application period. This includes a person who had ceased supply and wishes to recommence supply but does not include sharemilkers. Fonterra may require a deposit from a new entrant or a shareholder. The restrictions on the amount and time for payment of the deposit and the balance are outlined below.
However, it should be noted that some provisions allow Fonterra to refuse the supply or to postpone the commencement of supply for which an application was made during the application period. These provisions (capacity constraint notices and exceptions to accepting entry) are described opposite.
Capacity constraint notices
Normally, Fonterra must accept[1] milk from new entrants and shareholders, who applied during the application period to start or increase supply, at the start of the next season, i.e. 3-6 months after applications were made. However, in cases where Fonterra does not have the capacity to 'reasonably manage' the processing of the expected increased supply, it may post a 'capacity constraint notice' for a specified geographic area.
The capacity constraint notice must be posted no later than the first day of the application period.
The effect of the capacity constraint notice is to defer by a year the time at which Fonterra must accept supply from new entrants or increased supply from shareholders who apply in an application period when the notice is in force. Those new entrants and shareholders are guaranteed access the following year, at the start of the season. Fonterra may take supply earlier by agreement but this option must be offered to new entrants and shareholders in the order that their applications to supply milk were received.
Exceptions to accepting entry
There are two exceptions to the obligation on Fonterra to take new suppliers.
Fonterra can reject applications where:
- the farm is very small (less than 10,000 kg milk solids per year, or about 40 cows); or
- the cost of transporting milk from the farm to a factory would be higher than the highest cost of transporting 1,000 litres of a shareholder's milk to that factory, and an Order in Council has not removed Fonterra's right to refuse suppliers on this basis in that geographical area.
It should be noted that Fonterra is able to refuse to accept milk if a new entrant or a shareholder does not meet the applicable terms of supply (for example, the milk does not meet the required hygiene standards or the farm access arrangements do not comply with Fonterra's terms and conditions).
General behavioural obligations
No discrimination between suppliers
Fonterra must ensure that the terms of supply that apply to a new entrant:
- are the same as the terms that apply to a shareholder in the same circumstances; or
- differ from the terms that apply to a shareholder in different circumstances only to reflect the different circumstances.
Regulation of supply contracts for raw milk
Fonterra must offer a new entrant a contract for milk supply for one season.
Fonterra is permitted to enter into a supply contract with a new entrant or a shareholder for longer than 12 months if at least 33 per cent of the milksolids produced within a 160 km radius of any point is supplied:
- under contracts with Fonterra that either expire, or can be terminated without penalty, at the end of the current season; or
- to an independent processor.
Along with the provision that facilitates exiting by shareholders, this provision is intended to ensure that some shareholders are actually able to exit.
Right to supply independent processors
Shareholders are permitted to supply up to 20 per cent of their weekly milk production to independent processors. This allows shareholders to supply alternative processors without having to risk turning over the entire farm's production to an unproven new processing venture. Any shareholder that exercised this option would be able to apply to recommence supplying 100 per cent of their milk to Fonterra during the next application period. This 20 per cent rule does not apply to suppliers of certain speciality milk.
Fonterra may require shareholders to store milk for supply to independent processors in separate milk vats to the vats used to store milk for supply to Fonterra.
There are some limits on the 20 percent weekly volume that can be supplied to independent processors. Most importantly:
- a shareholder wishing to supply some milk to an independent processor must give Fonterra at least 20 working days' notice of the arrangement for the collection of raw milk by independent processors; and
- the percentage of the weekly production allocated by a shareholder to independent processors throughout the year with the exception of October cannot be higher than the average weekly allocation to independent processors in October. This means that a shareholder will have to ensure that the amount of milk that they supply to independent processors prior to October will not be greater than the amount they will supply in October.
In addition, a shareholder exercising this right will be required to surrender a percentage of their Fonterra shares equal to the percentage of milk they intend to supply to the independent processor.
Exit
Fonterra must allow a shareholder to cease or decrease supply when this shareholder has notified intended exit or decrease in supply for the next season during the application period.
A shareholder may give notice to cease or decrease supply at any other time (outside an application period) but the DIR Act does not require Fonterra to accept such an application.
Sale of milk vats
Fonterra is required to sell at market value to an exiting shareholder any milk vat situated on his or her farm, when required by this shareholder. The DIR Act specifies the process to be followed to appoint an independent valuer in the event that agreement is not reached by Fonterra and the shareholder.
Payment on withdrawal
In accordance with Fonterra's constitution, a withdrawing shareholder must surrender all (if ceasing supply) or part (if decreasing supply) of their shares and peak notes. An exiting shareholder also has to surrender all of their supply redemption rights (defined below).
The DIR Act requires Fonterra to pay withdrawing shareholders for the surrender value of the relevant shares and peak notes within 30 working days after the end of the season in which the notice is given. Fonterra is not required to accept surrenders of shares and peak notes outside the application period.
Payment for shares surrendered
The surrender value of shares to be surrendered notified during the application period (and to be surrendered but notified outside the application period, if accepted by Fonterra) is the share price multiplied by the number of shares surrendered.
Fonterra may pay or satisfy payment of the surrendered amount by:
- payment in cash;
- issuing capital notes in lieu of cash;
- issuing supply redemption rights at the request of the withdrawing shareholder and under special circumstances; or
- any combination of the above.
Payment for peak notes surrendered
The surrender value of the peak notes for withdrawal notified during the application period (and for withdrawal notified outside the application period, if accepted by Fonterra) is the peak note price multiplied by the number of peak notes surrendered.
Fonterra may pay or satisfy payment of the surrender amount by:
- payment in cash;
- issuing capital notes (defined below) in lieu of cash; or
- any combination of the above.
The DIR Act gives Fonterra a discretion to satisfy all or part of the total surrender value by issuing supply redemption rights but it can only issue supply redemption rights if shareholders request them. Fonterra's constitution sets out how Fonterra will exercise this discretion. Under its current constitution, Fonterra may issue supply redemption rights for cooperative shares only and not for surrendered peak notes.
[1] This requirement is subject to the 'exeptions to accepting entry'.
