Between the lines: Dairy leaders face testing assignment

The apparent calm in the dairy industry following last year's boisterous activity over the mega co-op proposal is deceiving.

Behind the scenes its leaders are wrestling with a thorny issue - how to retain farmer ownership of the industry generations of them have built as it shifts from being a producer and supplier of New Zealand milk products to being a major international marketer trading in products sourced worldwide.

The key will be some mechanism for returning profits to shareholders from a range of income streams that is not simply bundled into a payment based on the amount of milksolids they produce.

So far, one of the few things agreed is that there is no off-the-shelf solution and they will have to invent their own.

Of course, some argue farmers should not expect to retain ownership, that they will never be able to pay for the sort of growth their industry needs to become a major global player, and they do not have the business acumen to achieve it.

But, as Dairy Board chief executive Warren Larsen is reminding farmers in meetings this month, they did not invest 30 years in building the industry to this degree - developing such intangible assets as powerful brands, technological innovation and capable people - to hand it to someone else.

He warned of the "Enza factor" - the recent takeover by corporate raiders of assets built by generations of apple growers.

Co-operative principles had been hugely significant in developing the industry to this point but as shareholder value continued to escalate the industry needed to decide how, when, and on what basis the value could be accessed by shareholders without risking the things that had been important to present success.

The complex issue needed to be resolved rapidly, he said. Value was already being destroyed and the pace would only accelerate if the industry continued under the severe handicap of having only half an eye on the market and relying on surrogate pricing measures for manufacturers instead of market signals.

Options the industry is considering include farmers having the choice of taking shares in the more high-risk parts of the marketing business and allowing share trading only among themselves. The limited market would mean the shares would never achieve their true value, but allowing trading at large could create an entrance for raiders.

And, while farmers leaving the mega co-op could possibly continue to hold their shares after they ceased supplying milk, what would happen if they wanted to cash up?

A co-operative reliant on its shareholder capital can afford only to dripfeed it to departing members but is that fair to them? The Commerce Commission has said no, and that the industry must allow fair value and timely entry and exit. It will not sanction the mega co-op without it.

That raises the spectre of a run on capital, which could kneecap the mega co-op at a time, following the inevitable deregulation its formation would bring about, it would face competition in its patch.

Farmers and their leaders have no choice but to resolve the issues speedily or see the promise their industry now holds evaporate before their eyes.

An important first step could be to make the mindshift from believing the only way to make more money is to produce more milk.

If they do that they may find it will not be so bad just sitting back and counting the dividend cheques as they roll in.