Co-op plan is questioned

By Philippa Stevenson

Agricultural Editor

The future structure of the dairy industry has become an economists' battle ground, with one New Zealand consultancy supporting a mega co-op and another saying there could be value in competitive companies.

Meanwhile, the Dairy Board says it consulted two more sets of economists before it announced a plan for industry integration.

In a December report to the board, the New Zealand Institute of Economic Research evaluated the costs and benefits of a centralised marketing organisation against multiple marketers.

Its case study assumed three competing companies would "introduce competition that will aggressively bid away premiums in the commodity business. Any advantage that a single entity had would be whittled away."

For instance, the split up of brands would create competition between New Zealand firms "because each company will want to be in a position to take advantage of any premiums in all dairy markets throughout the world."

Competing companies would spend little or nothing on research and development, and reduce spending on advertising and promotion. Manufacturing costs would be lower, product development less sophisticated and branding simpler.

However, in a review commissioned by the Government's Producer Board Project Team from Economics and Law Consulting (ELC) , Victoria University professors Neil Quigley and Lewis Evans questioned the market power of the sole exporting Dairy Board.

ELC argued that market power is defined as the ability to have a dominant influence over the production, acquisition supply or price of goods or services in a market.

"We are not provided with any evidence that it [the board] is a monopoly supplier of those products in any significant international market. Indeed, it seems implausible that the [board] could have monopoly status in any of the aggregate regional markets used in the report, although it may have some market power in narrower quota markets."

ELC rejected the suggestion that competing companies would kill premiums in commodity markets, instead proposing "that the commodity premiums may be derived simply from higher price levels in those countries with higher per capita income, [so] competition would have no impact..." Competing companies would not necessarily maintain a presence in every market "because profit maximisation by each firm will not require this."

ELC suggested that private sector companies may invest more in brand recognition and would not necessarily spend less on research.

Summing up, ELC said NZIER's finding that a single exporter would out perform multi-company exporters was derived "from the assumptions made rather than from ... any plausible data."

As recently as April the board sought a response from NZIER to the review but yesterday said the mega co-op option was not based on its work and was "certainly not called into question by the ELC paper."

NZIER told the board its report was the last of many communications with it and was not intended to be interpreted in isolation.