Hon Jim Sutton - Speech Notes
10am, 15 February 2001
Dairy Farmers of New Zealand conference,
Flock House, Bulls

President Charlie Pedersen, ladies and gentlemen. I'm delighted to be here today.

It's an exciting time to be involved in the dairy industry ? increased milk flows, the dairy mega-merger's back on track, and the Dairy Board is making record milk solid payouts.

Things are looking up.

Obviously, it's not that easy.

We've been lucky with the weather so far, and the dollar has been in our favour as well.

The hard work of New Zealand's trade officials, particularly through the last comprehensive multilateral talks the Uruguay Round, has lowered barriers to our dairy products in many countries. That has ensured there are markets for the products of your increased milk flows and has enabled the Dairy Board to get in the position where it can now offer record payouts.

Sometimes trade policy seems a bit airy-fairy, but it can have a concrete effect ? in this case, a lot more money in your back pockets.

I've had a tendency in the past year to get enthusiastic about my trade negotiations portfolio. It is because I can see the benefits of trade liberalisation as having such an impact on the living standards of New Zealand citizens. A very substantial proportion of the increased payout this year is directly consequential on the constaints on export subsidies, particularly of milk powder products, by industrialised World Trade Organisation members.

The more markets we can sell more of our excellent New Zealand dairy products in the better!

But on to the big issue in the dairy sector ? the mega-merger. The hot topic on every dairy farmer's lips these days must be the dairy industry mega-merger.

And well it should be: this is probably the biggest business deal proposed in New Zealand's history, involving our country's biggest export earner. Of every export dollar, the dairy industry earns more than 20 cents.

So, the proposed merger of NZ Dairy Group, Kiwi Dairy, and the Dairy Board is a big deal, and not just for dairy farmers, but for everyone in New Zealand.

Because of that importance to all New Zealanders' standards of living, it is vital that we get it right.

For that reason, the Government is not rushing a decision on whether to send the merger proposal to the Commerce Commission.

Since the two dairy companies' leaders announced the merger proposal on December 21, the Government has been working hard to analyse it. It's not an easy task. There are many complex issues of public policy to be worked through.

I have said before that I think a June 1 start date is unrealistic, and I still believe that.

While much goodwill has been shown by both government officials and industry representatives at joint working party meetings so far, there is still a long way to go.

The working group has met twice this month, and will be meeting again today. A significant amount of information has been handed over. Many skilled analysts are working night and day on it. I hope to convene a meeting of ministers early next month to go through some of this with my colleagues.

Believe me, we are taking this proposal seriously.

There is little more that I would like to see than this merger go ahead. I am on record as saying the status quo in the dairy industry is not sustainable. It will not enable us to take on the global challenges facing dairying. It leaves us far too vulnerable to non-tariff trade barriers. It does not equip us, in most of our major markets, to become effective category managers increasingly sought by the modern mega-scale retailer.

So let's get it straight ? the Government wants to facilitate this deal.

But we're not rubber-stamping Kiwi and NZ Dairy Group's proposal without ensuring that vital public policy objectives are satisfied. This is way, way too important an industry.

Some have suggested that this industry is too important, too unique, to be put to the trouble of meeting the objectives of Commerce Commission scrutiny. The opposite is the truth. This industry, above almost all others, must be required to meet those standards because if it does not, the damage to the interests of every New Zealander is potentially too great.

Four issues the Government needs more information on is how the Global Dairy Co model will address future contestability in the industry; unbundling; fair entry and exit arrangements; and the future administration of tariff quota access.

Another issue that has to be sorted out is the position of sharemilkers. I have been told by the chairman of the sharemilkers section of Federated Farmers, Conall Buchanan, that the provisions negotiated for the inclusion of sharemilkers as shareholders in the first proposed MergeCo have been dropped from the Global Dairy proposal. Whether this is fair is something that will have to be looked at.

Being fair to minorities is, you may recall if you follow politics closely, one of the three conditions for Labour Government support for producer board reform proposals. The others were solid supplier support, and our being satisfied that proposed statutory powers are in the public interest.

The law in the public interest imposes a wide range of requirements on commercial organisations. The advocates of Global Dairy propose that your industry be exempted from many of them. I can tell you that my colleagues and I feel keenly our responsibility to understand and be convinced of the merit of each detail of that. We are not going to be deflected from our duty, and we are not going to take a lot of short cuts. Anyone who thinks that this process can be completed in a few short weeks really doesn't understand what is involved.

Some commercial law experts believe this proposal, with necessary fine-tuning, could pass Commerce Commission scrutiny. They think that would take two years. We will try to meet similarly rigorous, though made-to-measure rather than off-the-peg, standards in a lot less time than that.

Please do not tell me that the Commerce Commission was purely or mainly concerned with competition in the domestic consumer market. That is simply not so. The commission, and the Government, is mainly concerned that this vital industry will not be set up for capture by some future management, who may be tempted to solve every problem that comes their way by shaving another whisker off the farmers' milk payouts or dividends.

Remember, Kiwi suppliers will no longer be able to judge the performance of their directors and managers by looking over the fence at NZDG results. Or vice versa.

The substitute for real competition ? or in this industry, real benchmarking ? can probably only be genuine contestability. That is, there must be a real prospect of a new entrant, with better ideas and sharper efficiency, coming in and capturing market share by luring away Global suppliers.

That is the secret fear that can, I believe, sufficiently concentrate the minds of Global managers and directors. To make this work, there must be no possibility of Global distorting entry and exit prices, or cross-subsidising milk prices from marketing or intellectual property premiums, or otherwise acting in anti-competitive fashion ? and thus making entry into the market a virtual impossibility.

Entry into this market would be incredibly difficult anyway. It must not be made impossible, or sooner or later you, and the nation, will pay a huge price.

Not that you, or we, would probably ever really know this. Remember, Global will not merely be in unchallenged control of your business, it will also be the overwhelmingly dominant supplier of information.

That is why I and others go on about things such as unbundling. Unbundling means you knowing what your milk is worth, what your off-farm assets are earning, and how your managers stack up.

It also means that you know what your assets are worth. In other words, if you get a better offer, you can sell your Global shares at a fair price in order to invest in an alternative dairy company ? or in another industry.

Without fair exit and entry values being assured, there can be no genuine contestability by potential new entrants. And without real contestability, all our experience tells us there will be no truly sustainable high performance.

Some people think that there are bureaucratic substitutes for commercial disciplines. One such mechanism is the proposed shareholder council ? a sort of committee charged with scrutinising company performance.

Don't get me wrong. I think this could be a great idea. But I am yet to be convinced that on its own, it would be sufficient. I know of nowhere in the world, I can point to no consistent top performer, that can put my doubts to rest.

I and my colleagues do have an open mind ? but our open minds need evidence, not rhetoric, to be persuaded.

We start with a great competitive advantage ? the most efficient milk supply base in the world. But increasingly it is knowledge, research, science, and technology, and marketing grunt that determine success. If we are to meet the challenges of the changing world, and stay ahead, we need to get everything right about this new structure.

But while the Government scrutinises the mega-merger proposal, that is only one side of it.

You as dairy farmers, as owners of the industry, have a crucial role to play. It is ultimately on your shoulders too whether this deal lives or dies.

If the Government is to agree to change the dairy industry legislation, any new structure must have a mandate from industry ? a mandate for change from you.

You must make sure you are satisfied with anything proposed by industry management? This is your industry, you must have a say. After all, without you producing the milk, the dairy company managers will have nothing to manufacture or market.

Before making any decision to support the mega-merger, you must be satisfied you have all the information you need from the dairy companies. It is vital that you make such critical decisions on a well-informed basis.

I encourage you to encourage your companies to pass on all the information you need.

In closing, the dairy industry is in a period of flux. It's an incredibly exciting time to be involved.

As minister of agriculture, I want to work in partnership with you to ensure the best outcome for the industry. We may not always agree, but we need to listen to what each other has to say and take that into account in decision making.

I'm sure you'll have many questions to ask me, and I will answer them as fully as possible.

Thank you.

ENDS

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