Looming battle for overseas dairy markets

By PHILIPPA STEVENSON

The New Zealand dairy industry is facing multiple threats to its continued success in the international market which only a consolidated industry can begin to address, says a new report.

The report by international management consultancy PA Consulting paints a grim picture of the future of the dairy industries on both sides of the Tasman if they do not change fast.

PA managing consultant Brian Shaw said the big New Zealand companies, Kiwi Dairies and New Zealand Dairy Group, at present deadlocked over a merger, had to get together just to defend their current business.

"These companies would then need to seek further partners if they were to become global players."

He said big threats to the industry were rising costs, low productivity and more competition from other dairy producers such as Argentina, Poland and Australia.

Low production costs had until now been New Zealand's main competitive advantage in the world market but those costs were rising 2.3 per cent a year while other countries' costs were falling.

In the US, production costs were much higher than in New Zealand but were falling by 1.8 per cent a year.

"If you let all that go without doing anything, in five year's time you would have wiped $5 billion worth off the New Zealand industry," Mr Shaw said.

The report showed that an increasing proportion of value in the New Zealand industry was being added beyond the farm gate by marketing and distribution activities. It was coming from higher value products, better prices from increased demand, the payoff from investment in brands, global category management and the growing volume of milk being processed.

"In 1998-99, $5 billion was added to the value of the New Zealand dairy industry between the farm gate and the customer. This is an outstanding achievement in a cooperative industry where the processor guarantees to process all the milk its suppliers produce," the report said.

However, growth for the Australasian industries would be limited over the next decade by increasing competition in 5 per cent of the internationally traded dairy market.

"Growth is available in the 95 per cent of the market not traded internationally, but it requires significant capital to invest in offshore dairy companies and then to compete with the major global companies in their own domestic markets."

Mr Shaw said the Australasian industry would go backwards if companies did nothing.

"If you do something to counteract [threats] you actually create a situation which enables you to invest in other countries and take advantage of opportunities that exist overseas."

If companies did not get bigger they would simply be too small to attract the interest of the world's giant companies such as Nestle, whose dairy product revenue at $US12 billion ($24.6 billion) was three times the size of New Zealand's total dairy exports.

The report suggests industries consolidate to achieve scale, seek opportunities for mergers, acquisitions and partnerships with dairy firms overseas to access their domestic markets, and invest in biotechnology and process technology to improve productivity.