Cautious approach to mega dairy merger

By PHILIPPA STEVENSON agricultural editor

The Government will not immediately refer the proposed dairy mega-merger to the Commerce Commission, but has not ruled out the option.

The cabinet considered the $8 billion industry's proposal for merging Kiwi Dairies and New Zealand Dairy Group and integrating the Dairy Board at the first cabinet meeting of the year yesterday.

Afterwards, Agriculture Minister Jim Sutton said there was a lot of work to do before the Government could be satisfied it was in the public interest for the merger to be exempt from the country's competition laws.

"Our objective is to maximise the contribution of the dairy industry to the New Zealand economy while at the same time protecting farmer interests - including minority interests - and the interests of New Zealand consumers.

"We appreciate the opportunities the industry sees arising from this merger but we don't close our eyes to the potential risks and threats," he said.

Mr Sutton said the Government proposed a joint working party of industry and Government officials examine issues of contestability, fair entry and exit values for farmers, the unbundling of returns, and the future management of overseas quota markets.

New Zealand's most important processing industry wanted to establish a monopoly, risking the loss of dynamic efficiency and innovation, he said.

"At the same time we recognise the industry perceives a very important advantage for itself in maximising scale and critical mass; so if we are to accept the disadvantages of a monopoly we want to be sure that every possible structural and behavioural facility is installed to mitigate the risks."

John Roadley, chairman of the tentatively named Global Dairy Co, welcomed the working party proposal.

"The merger package is arguably the biggest single issue before the Government right now and we recognise that it will want to be fully informed before making decisions."

The industry had done its homework, and was confident it had a robust case, Mr Roadley said.

In an evaluation of the merger, released by Mr Sutton, Victoria University professor Neil Quigley concluded that the Commerce Commission would be likely to conclude that the detriments of the proposal would be well in excess of benefits.

Professor Quigley said it seemed important "that the industry seek an authorisation from the commission and consider structural means of reducing the detriments as a prerequisite for any legislative action by Government."

Mr Sutton stressed that the analysis was produced in a very limited time with access to limited information. The commission had no expertise in areas such as quota market access, and was probably less well placed than the Government to analyse responses from other nations.

"The industry feels from previous experience that it would like to deal with Government to cover all the issues in one package.

"We are prepared to work with them before we make a final decision on that," he said.

Mr Sutton said there was opposition to the proposal from farmers, some companies, academics and public servants but he had "no doubt of the overwhelming support of the grassroots of the dairy industry for this proposal, and it is, after all, the dairy farmers and their families who made the industry what it is today."

He reiterated that a June 1 start-up for the new company appeared unrealistic given the analysis required for the project, as well as preparation and public input to new legislation.