How NZ became a milk giant

29 Jan, 2014 03:24 AM
Under Fonterra, New Zealand has come to be known as Saudi Arabia of milk.

OPINION: MORE than any other, one name has been synonymous with New Zealand's major economic prosperity and geographic land use changes over the past decade: global dairy giant Fonterra.

In the wake of a staggering 48 per cent rise in global dairy prices over the past 12 months, many in the Australian milk industry are asking why a Fonterra can't happen here. After the regulatory hurdles faced by Murray Goulburn's attempted takeover of Warrnambool Cheese & Butter, local Australian dairy cooperatives can reasonably scratch their heads about why New Zealand's regulatory set-up cannot be emulated in Australia.

But just how did Fonterra come to be?

In the 1960s New Zealand was home to more than 100 dairy cooperatives, which sold their milk through the government appointed and bureaucratic New Zealand Dairy Board. Consolidations and amalgamations meant that by the mid-1990s, only two major players remained: New Zealand Dairy Group and Kiwi Cooperative Dairies. The commerce commission denied their application to merge on competition grounds.

However, there was a bipartisan push for a single producer with effective control over dairy in New Zealand. Despite the pro-farmer National-led government losing office in 1999, the new Labour-led government of Helen Clark exempted Fonterra from the Commerce Act.

In essence, New Zealand's political class decided that trading in domestic competition for international clout through one massive exporter leader would be better for NZ Inc.

There was also the view that a privately operated Fonterra would help shake up some farmer-centric attitudes of the old cooperatives and Dairy Board.

However, enshrined in the Dairy Restructuring Act 2001 was a quid pro quo. The Act effectively deregulated the dairy industry while creating safeguards against abuse of Fonterra's position.

First, Fonterra is compelled to accept the milk of any farmer who opens a dairy farm. Farmers have a right to buy a shareholding in Fonterra relative to the amount of milk solids they produce at the floating milk solids per kilogram price.

Second, any farmer can exit Fonterra at any time, and join one of the few smaller cooperatives such as Westland Dairy, and expect their shareholding paid out in a timely manner.

Third, and crucially, to boost domestic competition, Fonterra must sell up to 5 per cent of its raw milk to independent New Zealand diary processors at an agreed upon or regulated price, to a certain cap.

These safeguards were created for a very practical reason: farmers need certainty that their processor can pick up their milk everyday. For many farmers, a new start-up or independent processor would simply be too great a risk compared to Fonterra.

The upshot of all this is that once bone-dry paddocks are now lush and green, kilometre-long irrigators hydrate the land and milk tankers race across the new lush landscape. Under Fonterra, New Zealand has come to be known as Saudi Arabia of milk. It processes 95 per cent of the nation's milk and is responsible for a staggering third of the world's internationally traded milk, through acquisitions and expansion abroad. The scale that Fonterra achieved has been one of the key planks of New Zealand's prosperity for the past decade. In no small measure, New Zealand weathered the GFC on the back of Fonterra.

On the cons side, there are water use and effluent environmental concerns, for which Fonterra has often become a lightning rod.

Fonterra is also an enormous multinational co-operative, which means that it can become clumsy, inward looking and producer focused. The company's handling of a botulism scare last year (which turned out to be a false positive) was appalling, and does give rise to the suspicion that many Fonterra farmer shareholders are more interested in the short farm-gate payout and price of gumboots than the long-term satisfaction of the end consumer.

There is also interminable wrangling over capital raising and tensions between growth strategies and shareholder control.

On balance, Helen Clark's decision to override domestic competition concerns and approve Fonterra was good for New Zealand, for its farmers, the economy nationally, and for the government's coffers.

Were Australia to follow suit with similar removal of regulatory safeguards, it might find its dairy industry in better health.

Luke Malpass is a regular The Australian Financial Review columnist on New Zealand issues.



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