Review will judge dairying's future

By Rod Oram

Between the lines

The Commerce Commission has swung public scrutiny away from a sideshow of dairy industry reform and focused it on the real issue: the proposed merger of New Zealand Dairy Group with South Island Dairy Co-op.

The sideshow was Kiwi Co-op Dairies' effort to merge with South Island. Certainly, the deal was important to Kiwi. It would have given it a similar weight to Dairy Group as the two slugged it out for industry leadership and the ultimate prize - control of the Dairy Board.

Even though the South Island board spurned Kiwi by accepting a merger proposal from Dairy Group, Kiwi fought on. It had to, because the combined Dairy Group/South Island would process some 58 per cent of milk supply against Kiwi's 28 per cent.

First, Kiwi sought commission clearance for a South Island deal. It was turned down because the commission could only consider under a clearance application whether the merged entity would dominate in the South Island. The commission was not empowered to evaluate the more important question: would the benefits of the merger justify an exemption?

Second, Kiwi went back to the commission to seek approval to breach market thresholds which define dominance. This time the commission had to weigh the pros and cons. In its preliminary decision released on Tuesday, the commission said the deal was on balance beneficial and so gave it conditional approval.

But the commission was still snookered by its remit. It could only consider the deal based on current industry structure or on the probable near-term version of it. Yet, the industry will change dramatically and irrevocably as a result of mergers over, say, the next year.

So the watchdog decided it could not reach a final decision on Kiwi/South Island until it understood better how dairy industry restructuring might unfold.

Therefore, it has raised 13 questions, of which key ones deal with ownership and control of the Dairy Board, thereby dragging Dairy Group to centre stage.

The commission is calling for submissions on the questions before it holds a conference on Kiwi on May 5 and 6, prior to making its final decision on May 26.

So far Dairy Group and South Island have ducked the issues. They have told their farmer-owners that they do not need regulatory approval to merge because their combined market share would slip in under the 60 per cent threshold.

Perhaps the two co-ops believe their farmers' merger votes on April 14 and 15 will pre-empt the commission's wider probe. But that would be misguided. The commission can keep seeking answers to its 13 questions and it can challenge a yes vote.

It would be far better if Dairy Group and South Island were to co-operate willingly in the commission's thorough review. Nothing less than the future of the dairy industry is at stake.