REGULATORY IMPACT AND BUSINESS COMPLIANCE COST STATEMENT: APPLICATION FOR A
COMMODITY LEVY ORDER ON MILKSOLIDS
The Commodity Levies Act 1990 (the Act) enables the imposition of levies on
certain commodities, payable to organisations that are representative of levy
payers. Levy payers can only be producers of the commodity. Levies are imposed
by Order-in-Council, signed by the Governor-General on the recommendation of a
Minister. An application has been received under the Act for a commodity levy
order on milksolids produced in New Zealand by dairy farmers (owners and
sharemilkers) and for supply to a dairy company.
Statement of the problem and the need for government action
- If the New Zealand dairy industry wants to remain competitive in the
international markets, where it sells around 95 percent of its products,
worth around $5.8 billion in export earnings a year, it is vital for the
industry to continue with the research that was previously funded by the
Dairy Board. The industry must continue to improve its productivity and
provide quality assurances on its products. These can only be achieved by
investments made by industry participants, in activities such as
farm-focussed research, information transfer, and quality assurance
- Around $40 million needs to be raised each year from dairy farmers to fund
industry good activities that will benefit all dairy farmers. It will be
difficult to voluntarily fund these activities on an on-going basis because
of a free-rider problem. The provision of the outcome of these activities to
one person will not prevent another person from using it, and one individuals
consumption will not diminish the supply to other individuals for
consumption. It would be difficult for a funder of these activities to
appropriate to themselves (as opposed to non-paying industry participants)
the benefits of the activities.
- Previously these activities were funded by the New Zealand Dairy Board.
With the restructuring of the dairy industry in 2001, the 3 main dairy
companies agreed to fund the activities voluntarily on an interim basis for
a year, and have stated they will not fund them voluntarily in the future.
There are other small players in the industry who at present are not
contributing. With the deregulation of dairy exporting, new entrants are
expected in the processing sector. The free-rider problem with dairy farmers
mentioned above would also apply if voluntary levies were imposed on the
processing sector. Processing companies will fund their own product research
and development that could be protected with intellectual property rights or
otherwise, and the proposed levy in this paper will be used on farm-focused
research and other activities to benefit dairy farmers.
- These industry good activities rely on longer term investments and
therefore a longer term guarantee of funding. This guarantee cannot be
provided by voluntary levies.
Statement of the public policy objective
- The policy objective of the proposed levy order is to promote the most
efficient and effective means of collecting funds to finance industry-good
activities, whilst protecting the interests of those funding these
Statement of options for achieving the desired objective
- As stated in paragraph 4 above, the New Zealand Dairy Board used to fund
these activities. When the Board was deregulated in 2001, the three biggest
dairy companies, Fonterra, Tatua and Westland, who account for about 98
percent of the industry, agreed to voluntarily fund these activities during
2002/03 to provide for transition to a levy under the Commodity Levies Act
1990. Funding was based on the percentage of milksolids supplied in the
- Under the current interim arrangement, while the three companies are
paying the voluntary levy, it is the dairy farmers (98 percent of them) who
are indirectly paying for it by receiving a lower payment for the milk they
supply to the three companies.
- Only three of the 15 dairy companies currently operating in New Zealand
are voluntarily providing funds. The suppliers of the other 12 companies
free-ride under this arrangement. The three big dairy companies insist this
is untenable given the free-rider population could increase in the newly
deregulated industry and the inherent uncertainty surrounding voluntary
levies. The non-regulatory option of a voluntary levy paid by dairy
companies on behalf of dairy farmers as a long-term solution was rejected by
Fonterra, Tatua and Westland.
Regulatory Options (the Commodity Levies Act 1990) the preferred option
- As stated in paragraphs 2 and 5 above, it is vital the industry continues
to fund the proposed industry good activities, and that certainty of funding
is considered essential in order to optimise the achievement of long term
goals achieved in areas like research.
- The only statutory provision available to the industry is the Commodity
Levies Act. The Act is enabling legislation, giving the industry the
opportunity to impose a levy if the majority of participants in a levy payer
referendum support the proposal. The levy order will contain procedures for
setting the levy rate each year and deciding on levy spending.
- Dairy InSight Incorporated is an incorporated society formed by the
industry to replace the Dairy Board to undertake industry good functions.
This is the only body that represents all dairy farmers in New Zealand. A
majority of its directors will be elected by farmers. The dairy companies
will be used as levy collection agents for reasons of efficiency and
effectiveness, but farmers will be consulted by the board of Dairy InSight
on levy spending. The Act provides for accountability of the board to levy
payers, and has clear reporting requirements to the Minister and to levy
- The levy proposal is for Dairy InSight to collect and administer the levy
and contract service providers to deliver the outcomes. There will be a
clear funder-provider split, which is the most efficient and effective means
of delivering industry-good services.
Statement of the net benefit of the proposal
- Many of the projects to be funded by the proposed levy are a continuation
of long term projects previously funded by the New Zealand Dairy Board. Most
of these activities are unlikely to be funded if the proposed commodity levy
proposal does not proceed. Potential levy payers have voted in support of
the proposal because they consider that these activities should be
continued, and based on the information provided to them in the referendum
material they consider that there are net benefits for them from funding
- Dairy InSight has quantified the future net benefits from continued
investment in these projects. For instance, it estimates benefits of $17
million a year from the body condition score fertility project in the area
of animal improvement, $24 million a year from the national breeding
objective, and over $220 million a year from education to move five percent
of farmers from the bottom quartile of performance to the top quartile.
- The following example illustrates projected benefits from securing the
levy. Dairy InSight intends to contribute $300,000 annually to a consortium
of affected production sectors to eradicate Johnes disease. Johnes
disease is a chronic, infectious disease that affects cattle, sheep, goats
and farmed deer. The disease causes weight loss and death of adult animals
and is a world-wide problem in all advanced agricultural countries with
significant cattle and sheep industries. In New Zealand, it is widespread in
dairy cattle and sheep and is rapidly spreading in farmed deer. The cost to
the dairy industry of clinical cases, at the current rates of infection, is
$33.9 million per annum.
- Vaccination development is currently underway and could be available in
7-10 years time. At $300,000 invested per year the cost to reach the product
would be $2.1m - $3m. Vaccination would cost farmers approximately $5 per
cow per lifetime. For a 250-cow herd, that equates to $1,250 in the first
year and $287.50 thereafter at a 23 percent replacement rate. Within 5 years
the old stock will have been replaced with new vaccinated young stock and
the clinical cases should be zero.
Table 1: Cost of vaccination to eradicate Johnes disease
Investment into vaccine development
7 years @ $300,000/year
Investment to vaccinate 40% of national herd
Year 2-5 total
- Control of the disease by vaccination would result in a net benefit of
$18.4 million ($33.9 million less $15.5 million) in the first year of zero
clinical cases, with the net benefit increasing in subsequent years.
- The largest proposed expenditure item is funding the bovine Tb National
Pest Management Strategy. This would cost around $12 million a year, to
protect an industry that exports around 95 percent of its products worth
around $5.8 billion in export earnings.
- The proposed levy order is estimated to raise around $37.7 million in the
first year, including $6 million budgeted for extra spending on Tb control.
This will replace what the Dairy Board was spending (around $35million a
year, if the extra $6 million is included), and what the three biggest
companies have agreed to spend in the current year ($37 million, if the
extra $6 million is included). Dairy farmers were indirectly paying for
this. Therefore, the proposed levy order will not impose any additional
costs on potential levy payers, and on levy collectors, other than a small
percentage of farmers and small dairy companies who are currently
- The disadvantage to dairy farmers would be the opportunity cost of using
the levy money elsewhere. The direct costs to the industry would be the cost
of paying the levy by the levy payers and any administrative costs borne by
levy payers and collection agents. This is no different to the current costs
they are facing, except for the very small companies who currently are not
paying levies under the voluntary arrangement.
- Dairy InSight estimates that the cost of the proposed levy to the average
dairy farmer based on production of 78,914 kg of milksolids is $2,683 per
annum (excluding GST). At a projected payout of $3.60 per kg of milksolids
for the current season, the proposed levy rate of 3.4 cents per kg equates
to less than 1 percent of gross revenue from milk. Compared to the benefits
of the spending identified above, this spending is very small, and on
average the returns a farmer would get from spending this money elsewhere
would be far less than from these benefits.
- Consultation with potential levy payers by Dairy InSight involved a round
of farmer representative and major industry player meetings in
November/December 2001, a Statement of Intent distributed to all dairy
farmers in April 2002 and a round of nation-wide farmer meetings in
- The farmer representatives and major industry players consulted included
Dexcel, Fonterra, Tatua, Westland, Livestock Improvement Corporation
Limited, discussion group representatives, breed associations, Federated
Farmers and the Young Farmers Association.
- Dairy InSight also targeted rural professionals such as veterinarians,
bankers, farm consultants, accountants, universities and breed societies as
a link to dairy farmers. Rural professionals are an integral part of most
farming businesses. Consultation with rural professionals included posted
information including the consultation document, nine nationwide stakeholder
meetings held in January/February 2002, and a personal invitation to meet
with Dairy InSight.
- In the levy payer referendum, supporters of the proposal made up 63
percent of all participants, and they produced 67 percent of the total
production of milksolids by all participants. The participation rate was 59
percent, which is above the average for commodity levy referenda of about 40
- The three biggest companies (Fonterra, Tatua and Westland) who are
providing all the industry-good funds to Dairy InSight for the 2002/03 year
on a voluntary basis have stated that they do not intend to fund Dairy
InSight on a voluntary basis in the future. The three companies are
currently represented on the board of Dairy InSight, and they support the
compulsory levy proposal.
- The following government departments were consulted in the preparing of a
paper: The Treasury, The Ministry of Economic Development, Te Puni Kokiri,
and the Department of Prime Minister and Cabinet.
Business Compliance Cost Statement
Sources of Compliance Costs
- Compliance costs include the cost of collecting the levy by dairy
companies, and the cost of setting up systems for collecting the levy for
those companies not paying the current voluntary levy.
Parties Likely to Be Affected
- Fifteen dairy companies will be required to collect the levy. Twelve of
the 15 dairy companies are not paying the current voluntary levy, and they
together account for around 2 percent of the industry.
Estimated Compliance Costs
- Two of the three companies currently paying the voluntary levy already
have the collection systems in place and there will be no additional cost
arising from setting up the collection systems for them. The other 13
companies are currently examining or will be examining and installing levy
collection systems. Dairy InSight has offered to reimburse the costs, and at
this stage no estimate is available as to how much installing such systems
- As levy collection will be linked with payment to farmers for supply of
milk, the levy collection costs will be negligible for the companies. No
estimate of this cost is available.
Longer Term Implications of the Compliance Costs
- There will be one-off costs for setting up the levy collection system for
those companies not currently paying the voluntary levy. Over time, the
collection costs will be negligible as levy payment will be linked with
payment to farmers for supply of milk.
Level of Confidence of Compliance Estimates
- Dairy InSight is continuing to work with collection agents on installing
the collection systems, and at this stage no estimates of costs are
Key Compliance Cost Issues Identified in Consultation
- The collection costs and setting up systems for levy collection, as
discussed above, are the key compliance costs. These were identified early
in the process of developing the levy proposal. No additional issues were
identified during consultation.
Overlapping Compliance Requirements
- None were identified.
Steps Taken to Minimise Compliance Costs
- Using dairy companies as collection agents was identified as the most
effective and efficient means of collecting the levy. Linking levy payments
to Dairy InSight with payments to dairy farmers for milk supplied is a
further attempt to keep the compliance costs low. To cover the costs and
imposition of collecting the levy, collection agents are entitled to claim
up to 0.5 percent of the amount of levy collected plus the GST payable on
the fee, which they will deduct from the levy payment to Dairy InSight.