Dairy merger on commission's plate

By Rod Oram

Between the lines

The end game in the restructuring of the dairy industry took an important step forward yesterday with the decision by the board of South Island Dairy Co-operative to recommend to its farmer-owners a merger with New Zealand Dairy Group, of Hamilton.

Thanks to processing some 58 per cent of the nation's milk supply, the merged co-op will have the upper hand in decisions about the future operation of the Dairy Board, the industry's international marketing arm.

The loser yesterday was Kiwi Co-operative Dairies. South Island rejected its merger offer, leaving Kiwi with only 28 per cent of the nation's milk supply.

Thus, it will have a far weaker hand when it sits down with Dairy Group to decide issues such as who will produce what for the Dairy Board to sell.

Essentially for the industry, there are two ways forward.

Either Dairy Group and Kiwi can work together successfully on joint ownership and operation of the Dairy Board, although there will still be some industry inefficiencies.

Or Dairy Group and Kiwi can merge to create one co-op responsible for almost all the nation's milk supply. Then the industry can really hum, meeting the challenge of multinationals and returning maximum value to farmers and ultimately the national economy.

Yesterday, the odds tipped towards the second scenario. This is exactly the outcome South Island, which is very committed to the one co-op idea, is seeking.

It threw in its lot with Dairy Group to cause an inherent imbalance of power in the Kiwi Co-op-Dairy Group relationship.

Creation of one co-op cannot happen soon enough if the industry is to have the best chance of competing overseas. But that process of rationalising the industry remains painfully slow because of farmer politics.

Dairy industry politics are costing farmers dear in two ways -- through perpetuating inefficiencies and slowing the development of the Dairy Board's higher-value exports; and through the laborious and costly process of a series of bilateral mergers.

It would not matter to the rest of the country if the cost of all this was borne by farmers. But in fact the whole country suffers. The dairy industry accounts for 25 per cent of the country's exports. Therefore, less exports and smaller returns to farmers have an impact in country and town alike.

Given that the Government is too paranoid about offending voting farmers to take a lead on these issues, the last hope for a speedier resolution lies with the Commerce Commission.

It will announce next Friday its verdict on the dairy mergers. If it sticks with its old view that the South and North Islands are separate markets, the Dairy Group and South Island would be free to merge.

But that is nonsense. Clearly there is only one buyer for the vast bulk of the nation's milk, and that is the Dairy Board. Thus, if Dairy Group and South Island merge and control the Dairy Board, then Kiwi and other small players are seriously disadvantaged.

The only solution to that problem is for the Commerce Commission to declare that we have one national market. That would bring the issues to a head, forcing the industry to put internal politics aside and make the last great push of rationalisation to a single co-op.