Editorial: Fonterra at the crossroads but no let-up for consumers

Milking in a 50-bay rotary shed. Photo / Sarah Ivey, File

Editorial

EDITORIAL

The Herald’s probe into the medium-term future of New Zealand’s $21 billion dairy sector has turned up good and bad news.

With milk supply expected to decline due to land use change, environmental regulation and costs, and the prospect of similar shrinkage overseas with no diminution of global consumer demand, industry leaders happily quoted Economics 101 – dairy returns would likely continue to be strong.

That’s heartening for our 11,000 dairy farmers and the economy, to which dairying contributes 23 per cent of total export earnings.

Not so positive for Kiwi households. Dairy goods at the supermarket chiller reflect the global price of milk – due to a small population we export 95 per cent of all dairy production – and shoppers are already seething about prices.

Both outlooks turn the spotlight on Fonterra, New Zealand’s biggest business with an extraordinary 79 per cent market share of the raw milk market, even 21 years after its creation from an industry mega-merger enabled by special legislation. The next biggest dairy processor and exporter, New Zealand-owned Open Country has just 9 per cent.

Fonterra head office in Fanshawe St, Auckland. Photo / Michael Craig, File

Industry architects lobbied for the huge merger and special treatment with the argument Fonterra would be a national champion.

So far, its performance has been lacklustre. And shoppers, who don’t have to travel far outside any urban boundary to find dairy cows grazing around them, aren’t at all mollified when told a pack of butter costs $5-plus (on special) because Fonterra and its competitors have to pay the global going-price for milk. Blaming our supermarket duopoly can wear thin.

Fonterra’s competitors, comparatively tiny but noisy, allege its market power allows it to “game” the milk price it sets for the country by sheer dint of its size.

And no matter how much the farmer-owned co-operative reminds us the price is monitored by the Commerce Commission, we ask - particularly as inflation bites – are Kiwis getting a fair deal? Every year the cry goes up: would there be more domestic market competition if there was a truly independently-set milk price so exporting wasn’t the best money spinner?

But like the truth, commercial realities will come out in the end.

Fonterra’s bid to be an even bigger cheese offshore, with some resulting disastrous investments and huge financial losses in 2018 and 2019, has propelled it “back to basics”. With the focus now on the value of New Zealand milk and fresh leadership, performance is improving.

A milk tanker passes a dairy herd en route to Fonterra's Te Rapa dairy factory. Photo / Christine Cornege, File

While its minnow competitors argue that with the imminent passing of amendments to industry legislation, Fonterra has succeeded in getting removed yet another layer of checks and balances on its market power – in the name of needing a capital restructure – the company is facing a harsh reality.

With milk supply tipped to shrink and farmers required to buy shares to supply (unlike its feisty, now entrenched competitors) this privileged company is fighting for a future.

The sort of stellar performance and transparency we were promised back in 2001 is its best hope.