Milk wars open door to tighter Kiwi grip

By GREG ANSLEY Canberra bureau chief

An emerging crisis on Australia's dairy farms will probably add pressure for further mergers in an industry already shaken by the arrival of New Zealand's three big groups and the potential assault of the proposed mega co-op GlobalCo.

More than 300 farmers have left the industry, and almost 4000 more are expected to join the exodus over the next five years.

Incomes have been slashed in all states except Victoria, cutting estimated average farm-gate prices up to 30 per cent this financial year.

The trigger for this was deregulation of the milk sector last July 1, sparking a huge price-cutting war in the three big supermarket chains that is likely to intensify when Germany's Aldi group moves into Australia as well.

The combination of domestic pressures and the growing appeal of large conglomerates able to compete in world markets is expected to harden the case for mergers and acquisitions after last year's flurry of proposals, negotiations and sharemarket raids.

In New South Wales particularly, Dairy Farmers is likely to reconsider merger talks with former suitor National Foods as members of the cooperative face taking only a token $A1 ($1.24) a share with them if they are forced out of dairying.

The Australian Bureau of Agricultural and Resource Economics (Abare) says the average farm-gate price for milk in New South Wales will fall from A36c a litre to A25.4c this financial year.

On this basis, a 1999-2000 sample farm profit of $A43,613 will plummet this financial year to a $A9449 loss, adding to a crisis that saw 200 NSW dairy farms pull out of the industry after deregulation.

In the 12 months to last June, just 46 farms quit the state industry.

New South Wales producers are not alone in their problems.

An Abare study on the impact of deregulation reports that about 110 farmers in Queensland have quit dairying since last July, with two-thirds of the nation's dairy regions suffering medium to heavy blows.

The loss of Government support measures alone will strip about $A170 million from local and regional economies - consistent with a 6 per cent decline in the national gross value of milk production.

The speed and scope of the changes have gone further and faster than some industry stakeholders expected, says the study.

Blame is circulating just as rapidly as demands for further compensation beyond the federal Government's $A1.7 billion assistance package, financed by an A11c-a-litre levy on all milk.

Federal Agriculture, Forestry and Fisheries Minister Warren Truss has blamed the states for not sufficiently topping up payments from Canberra.

The worst-hit states, producer organisations and opposition politicians reject Mr Truss' argument, claiming that deregulation was forced upon farmers by Victorian and key industry leaders.

Overwhelming Victorian support for change was a big factor - but so was a widening gap between market and manufacturing milk prices, and the increasing prospect of a challenge to regulation under constitutional prohibitions to free trade between states.

Before deregulation, the industry was divided into two sectors: fluid or market milk, and manufacturing milk.

Market milk was regulated by state governments, which artificially maintained farm-gate prices above those for the unregulated manufacturing sector.

The consolidation of milk into a single, unregulated product forced rapid and sweeping change.

The three big supermarket chains - Woolworths, Coles and Franklins - were already pushing their own brands of milk and were now free to negotiate contracts with whichever supplier they wanted, and the lowest possible price.

In a key move, Dairy Farmers won the Woolworths contract at a hugely discounted price, allowing the chain to reduce its shelf prices and forcing its rivals to follow suit.

With the power to set margins shifting to retailers, processors passed on lower prices to producers.

The shockwaves moved to the big four of the industry - Dairy Farmers, National Foods, Victoria's Bonlac, and Pauls Milk and Dairy Products.

Analysts have suggested that this number should be reduced to two - a view given force last year by a rash of proposals that saw Dairy Farmers talking with its competitors.

But it was New Zealand which set the pace, aiming at transtasman groups with the muscle to go toe-to-toe with the world's biggest.

Kiwi Cooperative Dairies took a controlling stake in Western Australia's Peters and Brownes Food, the NZ Dairy Board is after 25 per cent of Bonlac and a joint Australian food group, and NZ Dairy Group has 18.2 per cent of National Foods.

If pressure from members forces a change of heart and Dairy Farmers and National Foods merge, Dairy Group would have a key strategic stake in a combined entity that would control roughly two-thirds of the Australian market in fresh milk and fresh dairy.

Should GlobalCo finally emerge, Bonlac would be added to the fold, bringing with it Australian market leadership in butter and cheddar - although mergers of these sizes would attract close scrutiny by the Competition and Consumer Commission.