KEY POINTS:
The dairy sector is rightly described as "the biggest show in town" for New Zealand agriculture.
Now meat company Affco has strode boldly into dairying's limelight by forming a new processing subsidiary Dairy Trust.
The Dairy Trust announcement follows a big fall in Affco's profitability from meat.
If
the new business achieves targeted annual turnover of hundreds of millions of dollars a year, it could become the second-biggest dairy processor after Fonterra.
Guiding Affco towards its new role has been fishing and food company Talley's, which last year increased its stake in the meat processor to over 50 per cent.
Andrew Talley - a director of Talley's, Affco, Dairy Trust and Waikato dairy company Open Country Cheese - said Talley's taking a majority stake in Affco was not linked to wanting to push it in the direction of dairy.
The business case for Dairy Trust had been developed after the takeover and arose out of Talley's exposure to dairying, he said.
Talley's has 30 per cent of Open Country, which says it's too early to say whether it will be involved with Dairy Trust.
While Talley's had driven the original idea for Dairy Trust, Talley said there was "strong and united support" from the Affco board for the move.
Diversification was a sensible move given the tougher times for meat. "You've got an industry which is consolidating at the moment and there's not a lot of organic growth left in the meat industry."
Dairy farmers in Northland, Waikato, Wanganui and Southland - where Dairy Trust plans initial operations - will no doubt welcome potential for extra competition for their milk. And expansion beyond this initial base is a clearly on the cards.
Fonterra CEO Andrew Ferrier greeted Dairy Trust's announcement with a warning the co-op would be a tough competitor for any new entrant.
Talley suggested the different size and style of Fonterra's and Dairy Trust's businesses would hopefully "blur the competition a little bit".
But, given the pressure Fonterra is under to increase supply and maximise payout, any "blurring" that Talley hopes for may not be very warm and fuzzy.
Quota Quandaries
Competition issues also mean debate is heating up over how New Zealand's $600 million-plus dairy quota trade is managed.
The Government has indicated to the Business Herald it is prepared to consider submissions advocating the auctioning of dairy quota rights to the highest bidder.
Quotas provide guaranteed access for dairy products, generally at preferential tariff rates allowing for higher profits. Under a commercial deal, Fonterra - with more than 90 per cent market share - now controls the quota trade, but its rights start expiring this year and the Government is looking at what to do.
A letter to the dairy sector from Agriculture Minister Jim Anderton has suggested allocating rights for seven to 10 years based on domestic market share in some cases, and a sort of first-come-first-served approach in other overseas quota markets.
But a dairy company employee has suggested a straight auction to the highest bidder. That could help to raise a significant sum for the Government from the sale of rights that are owned by the nation, he said.
A spokesman from Mr Anderton's office said officials were expecting that dairy companies would raise the possibility of an auction system in their submissions on the future of the quota markets.
The Government must clearly take a "what's best for NZ Inc approach". An auction could raise some very useful short-term funds for the public coffers. But it is also possible the extra cost involved for dairy companies could hit their profitability, payout for farmers and the longer-term well-being of the rural sector.
And an auction system could allow Fonterra - with its very big pockets - to consistently re-corner the juiciest bits of the quota trade. That could mean smaller or emerging dairy companies, such as Dairy Trust, wouldn't have a chance to gain valuable quota market experience, relationships and profits - a situation which could stifle the emergence of new competitors.
Also, Dairy Trust's Andrew Talley argues that while allocating rights based on market share is a good idea, giving them out for seven to 10 years would be wrong, as it would leave Fonterra with too much control for too long. "It's preferential treatment of the incumbent Fonterra."
And, in a submission to the Ministry of Agriculture and Forestry, he writes: "Providing yet another long-term quota monopoly to one private New Zealand company [Fonterra] is destructive of competition."
He says the current proposal would help Fonterra to out-price competitors trying to secure milk from farmers.
Anything which restricted the ability of competitors to gain domestic market share was "anti-competitive, protectionist and entrenches a monopoly position".
Game on.
Taste Trouble
Kiwifruit exporter Zespri has defended new taste specifications for green kiwifruit.
As part of the changes, Zespri will this year increase the level of grower payment related specifically to taste.
Some growers have complained it is too hard to meet the standards and that the new system could contribute further to last season's disastrous fruit loss if it encourages them to leave green kiwifruit unpicked for longer in a bid to improve taste.
Zespri CEO Tony Nowell agreed the new taste specifications were "challenging" for some growers and post-harvest operators, but they were necessary to maintain New Zealand's competitive edge.
Rivals overseas were determined to lift quality and consistency. "Unless we continually lift our quality and consistency, they will overtake us."
Michael Franks, CEO of the largest kiwifruit grower Seeka, was initially reported as saying that by increasing the payment related to taste, Zespri could make the green kiwifruit loss worse. But in a later statement he said he supported Zespri making decisions based on "market drivers".
"Zespri is charged with maximising net returns for growers and I recognise this means making some tough calls that won't always sit well with growers."
Murray Gough, the general manager of Satara, which last week reported 2006 results hit badly by fruit loss, said his co-op was staying publicly neutral in the argument over the extra taste payment for green kiwifruit.
But he said Satara did not want to see fruit unpicked for any longer than necessary. It also wanted to ensure its post-harvest facilities were most efficiently utilised, rather than standing idle early in the season because growers were delaying picking.
Allied Farmers
Shareholders in listed rural services business Allied Farmers have endorsed an issue of capital notes aimed at raising as much as $30 million to exploit a range of opportunities.
CEO David Bale had said previously that a number of opportunities had been identified. "Obviously we're not silly enough to specify what they are. But they're in our core business [of] rural services and finance."
And - despite not being given any more detail at a special meeting to vote on the notes issue last week in Hawera - shareholders decided to give their blessing.
Given that subsidiary Allied Prime Finance has become the major contributor to Allied's profits, it will be interesting to see what impact the fundraising has on the size of the company's loan book. Competitor PGG Wrightson has also been significantly growing its loan book.
More competition in the rural lending market could provide cost-savings for farmers.
