Crossroads of prosperity

By PHILIPPA STEVENSON

If international dairy traders were rugby teams, the New Zealand industry would be the All Blacks just before they ran on to the field for the second half against France in the 1999 World Cup semifinal.

At that critical point, the All Blacks' proud reputation built on nearly a century of creditable performance - some losses as legendary as the many wins - was still intact.

Unfortunately, the team lost the plot in the second half and an ignominious defeat left the All Blacks and their home nation feeling much the poorer for the encounter.

The dairy industry is about to begin a second half of similar importance. If it plays things right it could vanquish the opposition and be a leading global trader with a life expectancy spanning many a World Cup contest. New Zealand would be much the richer as a result.

But if it runs on to the field in its current state of disarray - including powerful, competing manufacturing companies dictating to the marketer - its opponents will cut through it like so many rampaging French wingers.

Former Dairy Board chief executive Murray Gough, a director of one of the country's big two manufacturing companies, Kiwi Dairies, identified the crossroads the industry had reached when he gave an address to this month's Large Herds Conference. "We are at the end of the solid highway we have followed for more than 40 years, and we need to choose a route forward ... extremely wisely and carefully," he said.

Twenty-five years ago, the industry passed a similar test when it faced the loss of its main market, Britain, who entered the European Union.

Instead of taking the safe approach of offering the same bulk products and hoping for buyers, the industry's leaders took the riskier option of investing in technology and marketing resources to move away from commodities, Mr Gough said.

Among New Zealand enterprises, the dairy industry was probably the only New Zealand-controlled manufacturing and marketing business which could expect to be internationally competitive on a significant scale.

The total sharemarket capitalisation of all New Zealand-controlled businesses, excluding Telecom, is around $20 billion, he said.

"If the proposed dairy industry mega-company is created, it alone will be worth $4 billion or $5 billion or more."

On the world scene, New Zealand dairy production is a small drop in a large bucket. By region, the European Union produces the most, accounting for 23 per cent of the global milk supply with 125 million tonnes. The Indian subcontinent is next with 91 million tonnes.

The list carries on through the likes of North and South America, the former USSR and Africa before it sinks to the combined production of New Zealand and Australia with 20 million tonnes, or 4 per cent. Individually, New Zealand is ranked 12th and Australia 17th.

But it is in dairy product trading where New Zealand's status becomes elevated.

About 95 per cent of world dairy products are consumed in the mostly heavily protected markets of their country of origin. Only about 5 per cent, or less than 30 million tonnes, is traded internationally and New Zealand has a 31 per cent share of that market. Combined with Australia's 12 per cent share, the two outrank the single biggest trader, the European Union, which trades 38 per cent.

Among trading companies, the Dairy Board is 12th in the world with revenue of $7.7 billion behind huge, top-ranking companies such as Nestle, whose dairy product earnings alone are around $24 billion, and Unilever with $22 billion. No Australian company is in the top 20.

The trend around the business world in industry after industry has been for companies to grow by acquisitions and mergers. In the dairy industry, the Italian company, Parmalat, has taken over around 80 companies in the past few years.

Denmark's giant cooperative, MD Foods, merged with the dominant Swedish cooperative, Arla, and four American cooperatives merged to form the fourth-ranked world player, Dairy Foods of America.

The organisations they sell to, including food service companies, retailers and manufacturers, and pharmaceutical manufacturers, are also consolidating. This means dairy companies have to do more business with fewer customers.

Management consultants PA Consulting, which has just published a study of the Australasian dairy industry, says the world's largest retailer, Wal-Mart, is now more than 20 times bigger than the combined Australian and New Zealand dairy industry. PA managing consultant Brian Shaw says such companies can now demand delivery into 40 distribution centres around the world from many manufacturing sites and then request just one invoice from the supplier.

In the future, there may be room for niche players with a single or few unmatched products but there will be no room for regional players, he says.

PA's report concludes that "consolidation [of dairy companies] is necessary to create companies with sufficiently strong balance sheets to invest in overseas companies and compete head-on with the world's largest dairy companies in their home markets."

Mr Shaw advocates mergers among the Australasian players followed quickly by moves on other countries' companies including Germany, France and South America where milk production is high, and dairy industries fragmented.

"This window, however, will not remain open for long since other major dairy companies are targeting these countries."

Mr Gough agreed. "Our competition is moving faster than we are."

For farmers, the sliding trend in commodity prices was depressingly clear.

Both men dismissed the idea that Kiwi or the bigger New Zealand Dairy Group, which last week halted merger talks, could succeed on their own as a global added-value business without eventually losing control to external interests.