By PHILIPPA STEVENSON Agricultural editor
The proposed dairy industry mega-merger reaches its first big milestone tomorrow, when Agriculture Minister Jim Sutton briefs the cabinet on the plan and the argument for its bypassing the Commerce Commission.
A Government response favouring the idea is not assured, and since the long-awaited announcement of a merger of the Dairy Board, New Zealand Dairy Group and Kiwi Dairies was made on December 21, the industry has marshalled its lobbying forces.
At the weekend, new Dairy Board chairman John Roadley released an 11-page letter to Mr Sutton which, responding to a request from the minister, set out the industry's case for exemption from the country's competition laws.
Mr Roadley, the chairman-designate of the new, tentatively named Global Dairy Co, said the submission presented "a comprehensive and compelling case that the Government is the guardian of the wider public interest and that only [it] can ensure the merger package produces the intended benefits to New Zealand.
"In contrast, the Commerce Act has a narrow competition law mandate," he said. "This would force the Commerce Commission to undervalue most of the benefits the merger will bring to New Zealand."
Benefits included having the world's 14th largest dairy company - with assets of $7.5 billion and revenue of more than $10 billion - owned and controlled by New Zealand dairy farmers. It would employ 18,000 people in 120 countries.
"The merger would give New Zealand its only company of truly global scale, responsible for over a third of the world's international dairy exports, over 20 per cent of New Zealand's exports and nearly 7 per cent of our national income."
Mr Roadley said a commission review focused on the small New Zealand economy would almost certainly lead to its recommending the breaking up of the industry.
That would result in companies underselling each other on world markets, and serve only the interests of huge multinationals, which would get cheap dairy products to sell at a profit.
Mr Roadley said the merger package contained protection for the domestic market, with Dairy Group's sale of its half of the chilled food company Dairy Foods, as well as safeguards for farmers supplying milk to the monopoly.
A spokeswoman for Mr Sutton said he would not comment before the cabinet meeting. The commission also refused to comment.
But Lincoln University marketing professor Tony Zwart, contracted by the commission as a reviewer of the industry's previous merger application, said it would be a "judgment call for the Government to decide whether to let the Commerce Commission have a look at it."
Professor Zwart said the principle of the industry's proposal, as a means of deregulating the industry, was pretty good because it allowed single-seller marketing controls to be removed while allowing a large organisation with a chance of long-term survival to form within New Zealand.
Dairy Group chief executive John Spencer said it became apparent during efforts to create the mega co-op a year ago that "the Commerce Commission was not the right vehicle to go through, and it could not deal with what we wanted to do."
Because new legislation was required, it was logical for the Government to oversee the entire process.
Kiwi chief executive Craig Norgate said the company would focus almost entirely on the international market, not the domestic market, with which the commission usually dealt. "While we don't want to shirk our responsibilities in the domestic market, we need to keep the big picture in mind."
With Dairy Group's divestment of Dairy Foods, which has 40 per cent market share, the domestic market would become more competitive.
The other market of concern to the commission was that for farmers' milk, but farmers owned the cooperative industry, giving them more control because they were both the seller and the buyer of the milk, Mr Norgate said.
The industry had unique qualities - it was regulated, cooperative and focused on the international market - so the proposal should not set any precedents for the commission.
The closest parallels were in Europe, where some Governments had realised that if they wanted their countries to be more than just branch-office economies, and home to big companies, they had to be prepared to let the companies be big, said Mr Norgate.
Mr Spencer said that because legislation was needed, it was expected the issue would go before a parliamentary select committee, allowing public input.
The executives were confident the new company could be operating by June 1. Their immediate focus would be to inform the companies' shareholders before a vote on the merger - requiring 75 per cent support - at the end of March.
Starting this week, Dairy Group has planned nine shareholder meetings nationwide, and Kiwi 22.
Mr Spencer said a video addressing key questions would be put on the GlobalCo website.
Since it was set up in December, the site - www.globaldairy.co.nz - had received more than 100,000 hits, a third from overseas.
He had also begun visiting manufacturing sites to address staff.
Briefings to the business community would follow the meetings with shareholders.
Mr Norgate said benefits from the proposal were already occurring.
Staff who had been trying to divide up the cake of industry earnings were trying to find ways of making more money for farmers.
"They are, all of a sudden, getting the opportunity to run the business as you would any normal business."
Links:
Full text of Dairy Industry submission to Minister of Agriculture
Dairy Industry position on merger
Summary of Dairy Industry correspondence with government
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