Roundtable calls for scrutiny of dairy mega-merger

By PHILIPPA STEVENSON

The Business Roundtable has joined calls for the proposed dairy mega-merger to run the gauntlet of the country's competition watchdog.

Executive director Roger Kerr endorsed the conclusions of Victoria University Professor Neil Quigley that the industry should seek Commerce Commission authorisation and consider ways to improve the plan before the Government looks at legislative change.

Mr Kerr said the report, commissioned by the Ministry of Agriculture and Forestry, raised serious issues about competition for domestic consumer products and farm milk.

"The argument that the merger proposal should be allowed to escape Commerce Commission scrutiny because most dairy production is exported is simply wrong."

Mr Kerr said features of the proposal, such as the basis on which domestic milk market company Dairy Foods, would be set up, the absence of price unbundling, and tradeable shares, quota rights and shareholder exit and entry arrangements could be serious barriers to competition.

"The Commerce Act is a perfectly satisfactory framework for assessing these issues," he said.

"There must be one law for all industries, not privileged treatment for some.

"At a time when the Government is promoting proposals which it believes would strengthen the Commerce Act, it would be totally inconsistent to exclude from its disciplines one of New Zealand's largest industries. We urge the Government to ensure that due process is followed."

The proposed Global Dairy Co - a merger of Kiwi Dairies and New Zealand Dairy Group and their integration with the Dairy Board - would process as much as 98 per cent of the country's milk production and market most of the 95 per cent of milk products that are exported.

But Professor Quigley's report said it was "hard to reconcile" the claim that the latest proposal would retain single-desk advantages in exports with another claim that the new structure would allow the emergence of viable competition.

He said the proposal did not establish Dairy Foods in a way that would allow it to be a viable competitor of the mega-company.

The proposed company would have nearly half the domestic market for milk goods in supermarket chillers, and the industry has proposed selling Dairy Group's half share to provide competition for its own domestic business, based on the Mainland operation owned by Kiwi.

Professor Quigley said the proposal also failed to provide for "unbundling" in the prices paid to farmers supplying milk, where money earned from adding value is lumped in with the money for procuring raw milk and for making farmers' shares in dairy companies tradeable.

Another big barrier to the development of competition was the plan to allocate all quota rights to the global company,, with a monopoly mainly for cheese exports, for 6 1/2 years.

Professor Quigley said the proposal could be improved if its plan to issue capital notes was developed or clarified, along with how it would deal with the Dairy Board stakes in the remaining small independent cooperatives, Tatua and Westland.

"Our assessment is that the GlobalCo proposal has detriments well in excess of the benefits," he said in the report released by Agriculture Minister Jim Sutton.

"The proposal does not represent the best deal for New Zealand."

The commission said in its 1999 draft determination that an earlier merger proposal was anti-competitive.

Professor Quigley's report indicated that the commission might not approve the latest structure either, leaving the deal pinned on a change in the law.