KEY POINTS:
Fonterra's star just keeps on rising amid the commodity boom, but the industry's "last man standing" maintains the future lies in specialised dairy products.
Mike Matthews, outgoing chief executive of Fonterra rival Tatua, is bullish indeed on the prospects for value-added products, the very side of the industry taking a hit as dairy commodity prices continue to rise.
"We are disadvantaged at the moment in relation to Fonterra because we don't make milk powder so their returns have surged ahead of ours because of the value of milk powder in this last season," admits Matthews, who has clocked up 44 years in the dairy industry, 12 of them as chief executive of Tatua.
However, he points out that since the industry has been through these sorts of cycles before - although perhaps not as great a peak as it is now experiencing - the current circumstances must not be allowed to divert Tatua from "the path we've been on now for well over 20 years".
With the price of raw dairy commodities squeezing his heavily value-added business, Matthews says Tatua will be paying its 116 farmer suppliers a lower payout, in the $4 range next season, compared with that of Fonterra, which some pundits predict will easily exceed $6.
Tatua is the world's biggest manufacturer of the speciality product lactoferrin, a milk protein used in sports drinks and infant formulas that is thought to boost human immune systems.
It also specialises in products such as dairy whip, and makes food service products such as cheese sauces, specialty creams, and icecream mixes.
Although these are its major exports, it also produces some 15,000 tonnes of commodities, but this is a relatively minor part of its overall business.
"The long-term prosperity of the New Zealand dairy industry is still in investment in added-value processing," says Matthews, "whether that refers to consumer products or specialised ingredient products or food service products, I'd like to see New Zealand continue to develop new products for the international marketplace."
Matthews denies Waikato Times reports that he will be taking up consulting work in the food industry when his replacement is found and says he has no firm plans as yet.
But you can safely rule out retirement or working for a Tatua rival.
"Tatua's future interests are still very precious to me and I would never set out to do anything that would in any way undermine [them]."
When Fonterra was formed in 2001, Tatua chose to remain independent, "because we felt we were able to offer our shareholders a better overall prospect".
And Tatua has largely kept its word, often beating Fonterra's payouts. And despite this season's aberration, Matthews says he doesn't regret the decision to keep out of the mega-merger.
He also firmly rebuffs claims by Fonterra and some smaller dairy producers that the Dairy Industry Restructuring Act 2001 needs changing so that independents like Tatua and Open Country Cheese - which have their own milk supply - don't have access to the 400 million litres a year of default milk that Fonterra is obliged to make available by law. "We're saying both of us are independents and the fact that we have access to our own milk is not relevant - it was the original intent of the legislation to make milk available to independents no matter how they were constituted."
Talleying the votes
Dairy Trust is hailing a victory in its bid to take over Open Country Cheese, but it is really a triumph for Nelson's Talley family. That is unless the takeover is so successful it will actually dilute the Talleys' control.
If Dairy Trust does indeed have acceptances of 50.1 per cent - the minimum needed for the offer to go ahead - after it "raises" its offer, then, according to the independent adviser's report, control of both Open Country and Dairy Trust will effectively be in the hands of the Talleys.
The Talley family enterprises include fishing, frozen vegetables, icecream and a controlling interest in meat processor Affco.
At 50.1 per cent, Dairy Trust will be able to pass ordinary resolutions and control the board of Open Country and its strategic direction.
According to the Ferrier Hodgson report, Talleys would hold or control 66.4 per cent of Dairy Trust at that level, because besides its direct 21 per cent holding in Dairy Trust, it would also control Affco's voting securities in Dairy Trust, given that Talleys owns 50.01 per cent of AFFCO.
If Dairy Trust gets 75 per cent of Open Country, it could pass special resolutions, including acquisitions or disposals of the company's assets. Talleys would control 56.50 per cent of Dairy Trust, so would effectively control all ordinary and special resolutions of Open Country.
More than 90 per cent would give Dairy Trust the chance to make a compulsory acquisition of Open Country shares, but at 100 per cent Talleys would hold or control only 49.1 per cent of the Dairy Trust shares on issue, not enough for outright control.
However, combined, the pre-bid parties would control over 70 per cent of Dairy Trust, and would most likely be able to control major transactions under the Companies Act.
Under this scenario the shareholders of Open Country not associated with Dairy Trust would hold or control 29.9 per cent of Dairy Trust, compared with 57.5 per cent at present. However more than 80 per cent of acceptances are unlikely, given Singapore-based agricultural commodities company Olam International's 19.9 per cent stake in Open Country.
Of course, if Dairy Trust gets between 50 per cent and 90 per cent of Open Country shares post offer, it can also raise its shareholding by 5 per cent a year under the Takeovers Code's "creep provisions", without making a full offer to shareholders. However, the independent adviser Ferrier Hodgson points out it can do this 12 months after it secures 50 per cent of Open Country.
And so, although the spokesman for the two remaining independent directors who oppose the takeover, Duncan Milne, is "relaxed" about having Dairy Trust as the majority shareholder, the final shape of this Fonterra rival in the making is yet to be decided.
But let's not forget Dairy Trust's "revised" offer is still a scrip-only offer - ie no cash - and actually lower than the last offer if you now calculate its valuation of Open Country shares using the independent adviser's own valuation of Dairy Trust shares, which is $1.10 instead of $1.34.
Genetics threat
The rate of genetic progress in the dairy industry is under threat as farmers get tired of testing their herds.
The Ministry of Agriculture and Forestry estimates that the net benefit of current rates of genetic gain in the national dairy herd is $400 million over 10 years - almost half of the industry's annual increase in productivity. However, the expense and time involved in testing has led the percentage of cows tested to fall 15 per cent to 73 per cent over the past decade.
Herd testing is important for animal evaluation and sire selection to "identify animals whose progeny will be the most efficient converters of feed into farmer profit" - but it comes at considerable expense and trouble.
Farmers at present have to test at every milking in a 24-hour period (usually this means twice, at the afternoon and morning milkings), and if they test any cows they have to test every lactating cow on the property. It costs $9.50 per cow or around $3100 for an average size herd a year.
To arrest the decline in testing, MAF is proposing a change to the herd testing regulations that will allow farmers to test just part of their herd, at a saving of around $500 a year, which might encourage more farmers to opt back into testing.
Another option is to deregulate herd testing, but MAF says that would mean the Livestock Improvement Corporation would control the core dairy database - which includes the information of most dairy farmers - and that could mean competition issues. Amending the regulations however would help ensure the core database continues to receive information about the production and progeny of a large proportion of the country's dairy herd, which will improve genetic selection, productivity and profitability for individual farmers.
