Giant co-op likely face of new dairy industry

By Philippa Stevenson

The dairy industry's worst-kept secret is about to be formally presented to New Zealand Dairy Group and Kiwi Dairies directors - there are three options for restructuring the industry, with a mega co-op heading the field.

The leaders of the country's two biggest dairy companies will this week be the first to hear the result of months of investigation by an industry working group, charged with recommending a structure which will deliver on the industry's strategic plan.

In subsequent days, other company directors will trek to Wellington to hear the news, which will be delivered to farmers in 20 nationwide meetings between May 10 and 31.

Meanwhile, directors are also considering a proposal by Kiwi to make a beeline for the mega co-op, encompassing at least 97 per cent of milk supply, and have it set up by the June 1 start to the new dairy season.

Dairy Board spokesman Neville Martin said the working group, comprising representatives of the Dairy Board, dairy companies and independent consultants, had whittled down more than 30 possible forms for the industry to just three.

While he declined to detail those proposals, he said there would be a "strongly recommended first option."

However, the three choices are widely known to be: two equal-sized companies, each incorporating an exporting arm; two equal-sized companies with one exporter; and the favoured mega co-op, incorporating one exporter.

Mr Martin said the industry's strategic plan could not be revealed for commercial reasons but "basically tells the industry it can do a lot more with its assets."

The New Zealand Herald understands that the study found around $400 million of annual savings could be achieved by merging dairy companies and adopting a smaller corporate structure.

The figure included the $250 million annual savings identified three years ago in an industry efficiency study. This year the board told farmers just $50 million of those savings had been achieved.

Mr Martin said a revamped industry would be expected to focus on reaping returns on sales of dairy products made from milk sourced outside New Zealand, and raising external equity to speed up strategies for adding value to the industry's products.

An industry financed by more than farmers would, for instance, be able to leapfrog time-consuming battles for market share by simply buying the leading brand in a market.

"The New Zealand dairy farmer has had the wit and wisdom to maintain control of the downstream assets, and from them extra income can come to offset declining commodity prices," Mr Martin said.

The problems the industry faces in reconfiguring itself include gaining Commerce Commission approval, and dealing with the domestic market.