KEY POINTS:
The mud has been slung firmly in Fonterra's direction recently with accusations of predatory buying and court injunctions to force the co-operative to supply milk.
South Island operator Dairy Trust and Waikato cheese maker Open Country Cheese (of which it owns 53 per cent) have complained to the Commerce Commission that Fonterra is using predatory buying tactics by paying more for milk in areas where it has competition.
Open Country interim chairman Wyatt Creech says predatory buying has increased during the past year.
"To begin with they just didn't think competition would ever get going but once it has now they're starting to resort to this kind of tactic," Creech says. "The public has to understand that the purpose of forming Fonterra was so that the dairy industry had a very strong player in the world, not so they could behave anti-competitively in New Zealand."
In another twist in the David versus Goliath battle, Open Country Cheese won an interim injunction last week forcing Fonterra to continue to supply it with milk at the regulated price, after the cheesemaker was late getting its forecasts in for March.
"I think there needs to be a review of competition law in New Zealand because our experience is that while you usually get there in the end it takes an incredibly long amount of time and in that time the anti-competitive practices continue," Creech says.
Barry Harris, director Fonterra Milk Supply, denies any accusation of anti-competitive behaviour. He says the company is bound by legal constraints in competitive law which mean the co-operative cannot pay more for milk than it is worth to it.
"What we believe we're doing is actively competing for the milk," Harris says.
"I can't see how that's anti-competitive - it is competitive."
Fonterra is forecasting a total payout of $6.90 per kilogram of milksolids for this season, which means the contract milk price will be $6.68, he says.
But the company will use tactical pricing in areas where it faces competition above the contract milk price, Harris says.
"Depending on the circumstances of that supplier we will offer what we believe to be a more competitive price."
Under the Dairy Industry Restructuring Regulations Fonterra has to supply up to 500 million litres to independent processors this season at the regulated price.
Fonterra says it collects and processes about 95 per cent of milk in New Zealand and is responsible for about half the production of dairy products.
Legislative requirements to supply regulated price milk for less than its value means Fonterra is giving smaller operators an easy ride, Harris says.
"I know the argument is that we're big and they're small but the reality is that we cannot afford to just sit back and watch our supply being cherry-picked by an increasing number of these small suppliers."
Competitors can affect the success and profitability of Fonterra, he says.
"It's a commercial relationship, this is not kindy."
The need for an injunction to sort out a forecasting issue is excessive, but this is not a supplier and customer relationship. Rather this is one company being required to supply materials to a competitor, albeit much smaller.
Fonterra was created to be strong and it will fight for every spoonful of milk it can get, which is all any business does.
The fact that Fonterra's creation was achieved with legislative support does make the debate about size and responsibility more complex, and if the regulatory intention is to ensure others can compete then those regulations must be enforced and if they do not work as intended then fix them.
Set the rules and if needs be blow the whistle.
One thing's for certain - don't expect any favours from Fonterra, and as smaller operators make inroads into the company we can expect some full-fat fighting.
ELECTION MESSAGE
Last week PPCS chairman Reese Hart failed to be re-elected to the board of the Dunedin-based co-operative meat processor.
Hart's departure follows that of John Turner who similarly failed to be re-elected as chairman of Southland-based processor Alliance Group in December.
Both departures are another signal of the desire of farmers to shake up a struggling industry.
Federated Farmers Meat and Fibre chairman Keith Kelly says Hart has been good for the sector.
"But the feeling in the industry is [it's] a time for change and they've been there for too long," Kelly says.
Turner had been on the Alliance board for 20 years and chairman for the past 10 years, while Hart has been with PPCS for 22 years, serving two years as chairman.
Alliance last month proposed creating a new entity to manage 80 per cent of the country's livestock supply from farm to market, aimed at lifting on-farm returns by about $400 million a year and delivering short-term gains of about $15 a lamb.
The two co-operatives together account for about 59 per cent of sheep-meat, 37 per cent of beef and 78 per cent of venison exports.
PPCS has given the Alliance concept early backing, while NZX-listed operator Affco is happy to talk when more detail is available.
Farmers appear eager for big change and the desire for new blood is probably not a great shock.
Kelly sees the votes as more a reflection on the state of the industry than on the men themselves.
However, Hart and Turner have been key leaders of an industry in which things are not looking so rosy, with many sheep farmers facing a third season of cash losses and animals selling for less than production costs.
Some key drivers have been beyond the exiting chairmen's control - drought and reform in Europe have driven an oversupply of sheep-meat into the market.
Similarly the exporters cannot influence an exchange rate that has been picking money out of farmers' pockets as fast as any price rise can put it in.
A prospective Alliance/PPCS merger came to nothing last year, although Alliance has argued it was not enough to generate the required benefits.
Maybe events had to come to the current state of play to generate the muscle required to turn desire for change into action.
The risk of doing nothing now appears to outweigh that from radical action.
TIGHT DEADLINE
Meat & Wool chairman Mike Petersen has said there is a crisis of confidence among sheep farmers.
One drawback of waiting until the eleventh hour to take action is that you have to move fast.
The Alliance concept is still only an idea and yet already hopeful industry talk is of restructure by October to coincide with the start of new season.
Considering the vast amount of work needed to move from concept to planning, reach agreement and take action, including legislative support, talk of October seems like a fairy tale.
Federated Farmers Meat and Fibre chairman Keith Kelly says it would be a miracle for restructuring to be achieved in time for the new season but every month counts.
"If you can have a company that is going to be up and running ... by October 1, you will strongly think about retaining your sheep," Kelly says.
Lambing will finish by October meaning farmers have to decide now whether to put rams out, sell off some ewes or change to cattle. Many sheep farmers have also been converting into dairy farming and support functions.
"There's a huge number of people killing their sheep and they're killing top quality ewes and we've lost that genetic base ," Kelly says. "If sheep do come back you start off at the bottom and you've got to breed up again."
All successful business concepts are founded on solid planning, proper resources and committed leadership, but many good ideas fail through poor implementation.
The conceptual radical shake up of the meat industry is far reaching and if its worth doing then it is worth taking time and doing it right.
The supply of sheep meat on international markets is correcting, prices should rise and farm equity remained solid with the option of converting to dairy functions.
Radical changes need cool heads and rock solid plans, with any talk of October 1 hugely optimistic when there are not yet any details to discuss.
FOLLOW THAT COW
A scheme for keeping an electronic eye on the movements of animals will get its inaugural pilot trial in the Waikato.
The National Animal Identification and Tracing pilot project will be run on up to 15 farms and by several meat processors for six months. Animals will be fitted with radio frequency tags and tracked as they move between farms, sale yards and meat processors.
Information will be recorded on a national database and aims to provide a lifetime traceability for all cattle and deer using a single system.
Ian Corney, chairman of the Nait Governance Group says the levels of industry support shows it is the right time for a working pilot.
The ability to see where specific animals are and a detailed movement history will improve biosecurity and the managing of disease outbreaks.
The system also aims to provide better access to world markets through meeting traceability regulations, particularly important in the US, Japan and UK.
