Fran O’Sullivan: Pressure on NZ’s big cheese

"What's good for Fonterra is good for New Zealand."

This adaptation of the old General Motors maxim generally rings true for our dominant exporter.

Three years on from its creation, Fonterra has embarked on external plays and consolidated its relationship with dairy farmer shareholders.

But, unlike General Motors, ordinary citizens cannot get a slice of the action in the country's largest export company without first buying a dairy farm. It is time to ask: Why?

Why is the Government encouraging oligopolies like Fonterra (and perhaps Telecom for that matter)? It must still be worried that international food companies like Nestle and Kraft will move in and swallow up the local market if Fonterra faces more competition.

Why is the Government not pushing this statute-created behemoth to take steps to leverage its position in the world dairy market through introducing private investment capital? This would allow Fonterra to produce dividends for all - not just its privileged 13,000 or so farmer-owners.

If the Government really wanted to make transformational change in New Zealand it would insist that Fonterra was not captive to its current owners, particularly because Cabinet Ministers frequently claim that one of the reasons why New Zealand companies do not maximise their growth is the lack of ambition of their owner-shareholders, who do not want to dilute their holdings and who are content to take regular cheques and an easy lifestyle.

This will be the message that will be given to small to medium sized export companies next year as Wellington tries to encourage more of them to "go global".

Why again has the Government done a sub-standard free trade deal with Thailand, which confers a trading advantage to Fonterra (and other agricultural exporters) but has failed to follow through for others in New Zealand business such as the service sector? They must wait for three years before negotiations begin for them in this particular FTA.

What makes this question more urgent is the pending free trade deals with China and the 10 Southeast Asian nations that make up Asean.

Dairy - like other agricultural sectors - will again be a prime beneficiary. But shareholders in industries such as the textile, clothing and footwear sectors will not be able to defray their losses by jumping into an alternative investment in the key winner.

The fortunes of the dairy industry lead the New Zealand economy. Fonterra - the dominant player - has it all: it is export focused; a commodity player; is exposed to the vagaries of exchange rates - particularly to the United States dollar, and is plugged into the Knowledge Economy with its ingredients and neutriceuticals business. Fonterra had $12.5 billion revenues in 2003. It has 23 per cent of New Zealand's export receipts by value.

It also has the backing of special legislation which overrode Commerce Commission concerns on competition policy issues and enabled its creation.

The Dairy Industry Restructuring Bill merged the NZ Dairy Board (a state trading enterprise) with the two largest cooperatives, NZ Dairy Group and Kiwi Dairies, to form Fonterra.

The previous Dairy Board export monopoly was scrapped, but the legislation gave Fonterra licensing and tariff quota rights in overseas quota markets for six years.

These include butter and cheese quotas for dairy exports to the European Union, cheese subject to quota to the US, butter to Canada, cheese and animal fats to Japan and whole milk powder to the Dominican Republic. The six-year time limit does not expire until 2007.

At issue now is whether that replacement system will simply confer Fonterra's current rights - a sort of milk-flavoured version of the fisheries quota system used in the Treaty of Waitangi grievance settlement making "dairy farmers the new Maori" - or whether it will be a pan-industry settlement that allows newer-comers some quota.

The latter is more likely if Fonterra is to escape charges that it is just a single-desk exporter. The EU - and other major players in the World Trade Organisation - contest the view that New Zealand agriculture is organised on free-market lines.

Critics believe the decision to grant all the key butter and cheese quota rights to Fonterra until 2007 gives the company an export monopoly and limits competition in its home market.

So, it would appear that change will ultimately be forced on the company through the WTO.

Capital investment, which the company clearly needs if it is to make quick headway with offshore investments, is a different matter.

Fonterra chairman Henry van der Heyden and chief executive Andrew Ferrier recently tested the waters with a so-called capital plan.

This has been sold as a mechanism for dairy farmers to sell more milk to Fonterra without having to increase their exposure to the industry through buying coop shares, and, to assist new entrants.

But it is also arguably a defensive move to stymie other players from acquiring milk for their own production needs.

The elements are tentative to say the least and hardly constitute a radical shift.

So what to do next? It should be no surprise that this Government passed legislation to create the dairy behemoth. Its predecessor - the fourth Labour Government in which Prime Minister Helen Clark was then Deputy PM - enshrined Telecom NZ as a dominant player when it was privatised in 1990.

Back then, it put constraints on ownership limiting foreign owners to 49 per cent of share capital and kept a golden, or Kiwi, share.

In Fonterra's case, it would be a simple matter to put through amending legislation which conferred majority control for the farmers through a "cooperative ownership stake" of at least 51 per cent. Van der Heyden and Ferrier would then be able to raise all the capital they needed - subject to cooperative approval.

If van der Heyden and Ferrier needed proof that the time to act is now they need only look to the rapid advances that former Fonterra CEO Craig Norgate has made with his rural services rationalisation.

Norgate has gazumped Fonterra twice - firstly by swallowing Wrightson and now by getting to pole position with Williams & Kettle.

The rural services position he is building has strategic importance, because of the relationships the Norgate-controlled entities will have with New Zealand farmers.

His ability then to marry his own farmer client base with other players - including the Nestles of this world - will be significant.

So too his ability to leverage his position through a public share offering.

Ultimately there will be a seismic shift. If Fonterra wants to stay on top it should maximise its position now.

* Fran O'Sullivan's column returns on January 24.