Between the lines: Backward look to future of dairying

By PHILIPPA STEVENSON

"Back to the future" is the accurate if bleak title New Zealand Dairy Group has given to its presentation to shareholders wondering what follows a failed mega merger.

The dairy industry is certainly going back - back to a drawing board of structural options that were rejected in favour of the mega co-op just months ago.

The key question is what sort of a future can come from a re-hash of rejected scenarios by leaders who have distinguished themselves by an ability to divide, not unite, their industry.

The gut reaction of farmers is to suspect they are pawns to be manipulated in some power game.

They have little other than their gut instincts on which to make assessments.

A year after it was shown to directors, the McKinsey report, which examined possible structures for the industry and on which key decisions have been based, is still a mystery to most of the country's 14,500 farmers.

Trust us, directors said, and told farmers all they needed to know was that the examination of possible structures had been rigorous and thorough and the mega co-op was the runaway winner.

After the mega co-op turned to custard in March with the collapse of merger talks between Dairy Group and Kiwi Dairies, Federated Farmers dairy section sought the report. It has been told a version may soon be available for distribution.

Dairy Group, meanwhile, has promised to send a summary to its shareholders within the month.

Chairman Henry Van Der Heyden told the Business Herald that the report mail-out had been "in the programme" all along and was set to occur after the current round of supplier meetings "once we had actually explained to them what the [review] process is we are going through."

It is hard to believe explanations about complex structural options would not have been clearer if the audience had had a chance to study them before the meetings.

But that is probably no harder to believe than that the industry is now reviewing a second-best structural option that Dairy Group deputy chairman John Roadley said was originally rejected because it risked "pulling the industry apart."

This structure, once regarded as sub-optimal, is described as two companies competing in ingredient products but having a joint venture to market consumer goods.

Its weaknesses were said to include a loss in the ability to capture strategic value of ingredients, a potential for losing premiums for commodities, and likely instability as each company tried to leverage advantages despite the joint venture.

Another option being reconsidered is two fully vertically integrated competing companies. That had been dismissed as destructive and unstable and likely to cost all the industry's advantages of scale.

If farmers feel uncomfortable in their guts, perhaps it is because they are being asked to swallow too much, too quickly.