Dairy giant's bluff called: Plenty of buyers for Fonterra factories if competition too much

Plenty of buyers for Fonterra's factories if it finds domestic competition too tough. Photo/Mark Mitchell

A large New Zealand company has called Fonterra's bluff over threatening to close plants if competition increases, saying it would buy Fonterra's under-used Lichfield factory in a flash and offer staff secure employment.

But the would-be buyer, which has declined to be named, says it would probably have to get in line, such would be the interest in the three year old South Waikato processing plant.

Interest would be strong from Australia and other countries as well as within the New Zealand dairy industry, said a principal for the company, who was irked at what he saw as Fonterra's attempt to "put handcuffs" on milk supply.

Milk production in New Zealand has flattened and is expected to decline.

"They're trying to put handcuffs on the milk because they are losing the ability to compete for it like everybody else," he said.

If Fonterra put any of its factories up for sale because of lack of milk "there would be buyers lining up tomorrow". Lichfield, in a prime position in dairying heartland Waikato, would be a plum buy.

Fonterra has been approached for comment.

Fonterra chief executive Miles Hurrell this week told the parliamentary primary production select committee the farmer-owned co-operative would have to consider closing plants if more competition developed in New Zealand.

The company, presenting its submission on the Government's proposals to change DIRA, the legislation governing Fonterra and the dairy industry, said the $380 million Lichfield factory was only running at 30 per cent of capacity.

This was because it had built the plant in response to 2014 signals that a milk flood was coming from central North Island dairy conversions.

The conversions didn't eventuate at the scale signalled.

Fonterra CEO Miles Hurrell has warned the farmer-owned co-op would have to consider closing plants if more competition developed in New Zealand. Photo / Peter Meecham

Fonterra, New Zealand's biggest company with around 80 per cent of the New Zealand raw milk market, offered Lichfield as an example of the problems it suffered being obliged by DIRA to accept all milk offered to it.

Fonterra wants this DIRA obligation, plus one requiring it to provide raw milk at a regulated price to competitor processors, removed from the legislation.

The rules were among those imposed in the 2001 legislation to rein in Fonterra's market power at home. The special legislation enabled Fonterra to be created from an industry mega-merger against the recommendation of competition watchdog, the Commerce Commission. According to latest available milk collection figures, Fonterra still has around 80 per cent of the New Zealand raw milk market.

The Auckland-headquartered company last month posted a 2019 year net loss of $605 million on asset writedowns of $826m.

In its submission on proposed DIRA reform, Fonterra said the purpose of the legislation had been to establish a New Zealand company with the scale to compete in the global market. The company had recognised some restrictions were required because of its associated domestic market dominance.

Farmer-shareholders also needed options and protections when deciding who to supply milk to and consumers needed options, it said.

But today there were 10 competitors operating 15 manufacturing sites in New Zealand.

Lichfield, in a prime position in dairying heartland Waikato, would be a plum buy.

Farmers in regions such as Canterbury, Waikato and Southland had many choices of processor. From 2002 to the 2019 dairy season, competitors' milk collections increased by around 830 per cent, compared to just a 37 per cent increase in Fonterra's pickups.

Fonterra said the DIRA reform Bill's proposal for the Government to nominate an appointee to the regulated milk price panel was unnecessary as the Commerce Commission provided adequate oversight of its work.

It called for greater transparency of how all dairy processors determined their milk price.

"All milk processors should be required to publish the average price they pay farmers, the key parameters of their milk price and examples showing the payout farmers would receive for different parameters."

Asia-Pacific food and beverage company Goodman Fielder, Fonterra's biggest competitor at the New Zealand supermarket chiller, told the select committee it believes DIRA's requirement for Fonterra to sell it up to 250m litres of milk a year at a regulated price should be lifted to 350 million litres.

Managing director Bernard Duignan said the requested increase reflected the big rise in New Zealand's population since 2001 when DIRA was enacted.

The DIRA obligation to supply Goodman Fielder with milk year round was made to ensure Fonterra had a strong competitor in the domestic retail products market.

Duignan questioned the DIRA bill's provision for Goodman Fielder to have to pay a 10c/kg milksolids premium in addition to the farmgate cost of the milk it received from Fonterra.

Either Fonterra's New Zealand brands business also paid that premium for the milk its parent company supplied it, or there should be no premium charged at all, he said.

"While we recognise that the addition of the premium may better reflect the actual cost of supplying year-round milk to Goodman Fielder, the premium does not apply to Fonterra Brands or any other independent processor," the Goodman Fielder submission said.

If a premium must remain, it should also be applied to Fonterra Brands and all independent processors buying regulated milk.

Fonterra's submission said it did not object to selling Goodman Fielder the extra 100 million litres requested. But it wanted DIRA amended to ensure the milk was used only in the domestic market.

Fonterra also wants a premium fee of 12c/kg milksolids rather than 10c, and wants it applied to all other processors buying its milk at a regulated price.