Dialogue: Two into one creates true global contender

By JOHN ROADLEY

The merger agreed between the boards of Kiwi Dairies and the Dairy Group just before Christmas is the most important business deal in New Zealand's history. Subject to approval from 75 per cent of the shareholders of both companies and the necessary legislative and regulatory changes, it promises to create the country's only company of truly global scale.

It would operate in more than 120 countries and territories around the world and generate more than $10 billion a year in revenue from $7.5 billion of assets.

The new company would be a uniquely New Zealand institution. It would be 100 per cent owned and controlled by New Zealand dairy farmers. It would generate over 20 per cent of our country's exports and around 7 per cent of our national income.

In research and technology, it would be the country's biggest investor aside from the Government and it would be our number one training ground for New Zealanders building careers in global marketing and management.

That the industry is in the position of being able to deliver these benefits to New Zealand can be put down to the successful partnership between government and dairy farmers first established in the 1930s. That partnership has been rewritten over the years in response to changes in the world economy and New Zealand's place in it.

Today's industry leaders and ministers are determined that that will go on. New circumstances call for a new legislative and regulatory framework and new strategies by the industry.

Around the world, dairying is a unique industry because the dairy farmer is the only producer who must produce every day, have that production collected every day, and who is exposed to the cost of dumping production if the system falls down. Because the milk supplier's needs are always immediate, the supplier cannot switch between dairy companies to solve service problems.

This commercial reality means the industry around the world is often organised on cooperative principles, with suppliers owning the local dairy company. That is how the New Zealand industry has always been organised.

In New Zealand, we have faced the additional issue that the volume of milk we can produce is far greater than our domestic market. We have had to be export-focused. Today, more than 95 per cent of our manufactured dairy products are exported.

This has been the reason for the export monopoly first established by the Government and farmers in the 1930s. We are a small country with a relatively small production base forced to compete globally against much bigger companies with enormous production bases. The export monopoly brought our industry together and has given us just enough critical mass to be able to compete successfully against the likes of Nestle and Kraft.

This united structure - farmer-owned cooperatives at the local level with the Dairy Board operating at the global level - has been the secret of our success. It has given us the strengths of unity and global scale.

From less than 2 per cent of world production we have come to dominate over a third of the international dairy trade. It has led to the situation where we compete successfully in more than 120 countries and territories.

The commercial environment has now changed. Where before there were hundreds of farmer-owned cooperatives requiring coordination by the Dairy Board, now there are just two major cooperatives, Kiwi and Dairy Group, and two smaller ones.

The structure is outdated. It creates costs and leads to lost opportunities in the marketplace which have been well documented. These are becoming even more serious as the industry consolidates globally into fewer, but even bigger, competitors and customers.

The proposed merger has been designed to maintain the ability of the industry to service those customers and the strength to deal with those competitors while removing those costs. It is now time to build on the united industry brought about by the 1930s legislation and forge a new form of unity in the new company, again acting through Parliament and legislation.

Cooperative principles will be maintained in the new merged company, which will be 100 per cent owned and controlled by New Zealand dairy farmers. Their interests as suppliers of milk will continue to be protected through their continued ownership of the company they supply to. There will also be rules to ensure farmers can enter and exit the company at a fair price.

The global scale of the industry will be maintained through the creation of the new company. It will initially have the same international scale as the Dairy Board but because the manufacturing and marketing arms of the industry will be unified it will be better placed to grow.

Provisions to promote the interests of New Zealand consumers of dairy products are also included in the merger package, such as the sale of New Zealand Dairy Foods, which markets the Anchor, Fernleaf and Fresh 'n' Fruity brands in New Zealand and has 40 per cent of the market.

Most important, we have asked that Parliament not only give the industry the opportunity to finally come together into one company but cancel the old monopoly on exports of dairy products. This means that major international dairy companies will be able to buy milk from New Zealand farmers, manufacture dairy products here and export them from New Zealand. This will ensure that the new company remains competitive and efficient by international standards.

Because the old structure of the industry was created by legislation, it can be updated only by the same. We have asked the Government to make the broadest assessment of the benefits of this legislation.

We have not asked the Commerce Commission about those broader issues for three reasons. First, the commission is not part of the ongoing partnership between the industry and Government. Second, unlike the Government, its focus is not on issues of national economic policy, New Zealand ownership, the need for world-scale companies based in New Zealand or changes in international markets. Third, the commission cannot step in later and regulate the future behaviour of the industry if that ever turned out to be necessary.

We have proposed that the commission would have a close supervisory role, in much the same way as it will have under the proposals for the telecommunications and electricity industries.

Fortunately, the Government and the industry are working closely through all these issues. We are both determined to maintain the partnership that has served us so well since the 1930s and led to potential for the new company to be the 14th-biggest dairy company in the world.

We are both determined to build on that foundation as we modernise our partnership to enable us to move into the top 10. We both recognise how crucial the industry is to New Zealand's well-being.

* John Roadley is chairman of the Dairy Board and chairman-designate of the Global Dairy Company.