The dairy industry: Bigger is not always better

The dairy industry's potential lies not in a mega-merger, but in remaining diverse, writes Dr WARREN HUGHES*.

The current plan for restructuring NZ dairying is a huge gamble NZ cannot afford. It turns the industry into a monopoly with nowhere to go if it does not succeed.

The rather bland name of GlobalCo says it all.

This is something Ian Fleming may have dreamed up in the 1950s before settling on the equally bland Universal Exports as a cover for James Bond.

Unfortunately, many NZ farmers continue to live in a similarly outdated fantasyland, in which bigger is always better.

The dairy industry can be segmented into three businesses. The first two are farm production and large-scale basic processing, followed by niche production and marketing of final products.

New Zealand is very good at the first, and our comparative advantages of climate, animal husbandry and support services make us unbeatable in this segment for maybe the next 20 years.

Firms like Waikato-based New Zealand Dairy Group (NZDG) and Taranaki-based Kiwi Cooperative Dairies should concentrate on this activity as separate companies, and there should be (at least) one South Island firm close to farmers there, concentrating on production problems unique to that region.

This gives NZ at least three large-scale processing companies, allowing comparisons to be made.

With a monopoly, there will be no comparisons for companies of similar scale. There seems no compelling reason at this time to force this type of firm to exchange its existing cooperative/farmer-shareholder structure for that of a publicly listed company.

One problem they should focus on is developing year-round production of milk solids to eliminate peaks and keep plants working near capacity.

In the second segment we have companies like NZ's Tatua and Swiss newcomer Movenpick. These companies may process directly from NZ milk solids as Tatua does or, like Movenpick, take basic product from firms like NZDG or Kiwi and turn this into consumer products such as cheese and ice cream.

Any sustainable advantage for these firms lies in their patentable processes and branding.

Companies such as Nestle, Mars, Kraft, Unilever could quickly augment this industry segment, setting up specialty plants in smaller regional towns, and reversing the mega-site trend of recent years.

Clearly this would be a significant plus for regional development.

The final segment of the industry in which NZ has developed some expertise is the global marketing of dairy produce, not all of which is produced in NZ.

The Dairy Board (NZDB) has 9800 employees worldwide, 620 of whom are based in Wellington.

The fragmented nature of global dairying (due to the limited life of milk and misguided Government intervention worldwide) has opened opportunities for organisations like NZDB to buy and sell in different markets.

Freed from the constraints of always putting the NZ farmer first, the NZDB could become a profitable company in its own right.

It may have its own brands commissioned from NZ firms, Australian firms like Bonlac and perhaps eventually from firms outside Australasia.

However, it could also supply marketing and financial services to NZ-based processors, which would expand the reach of such firms beyond the main markets serviced by their own personnel. As a global middleman, they would also provide the same services to foreign firms.

Of course, the NZ export monopoly currently enjoyed by the NZDB would need to go. Ideally, NZDB with a new name should list in its own right on the NZ stock exchange with existing farming organisations limited to a 15 per cent shareholding. That is, this public company should not initially be NZ farmer-controlled, because this could undermine its middleman role in the eyes of overseas clients.

That a farmer-controlled GlobalCo could efficiently accomplish all the above tasks, given their past record, is a beggar's belief.

The existing NZDG and Kiwi, plus one or two South Island basic processors, could retain their NZ subsidiaries marketing milk, cheese and so on in NZ, as well as overseas. Expanding the current supplier situation with new entrants such as Movenpick makes for an excellent outcome for the NZ consumer and the Commerce Commission.

Such an array of varied production and marketing expertise should also make the NZ dairy farmer very secure.

* Dr Hughes teaches in the areas of managerial and financial economics at the University of Waikato.