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NZ In The Global Market - John Roadley Speech

Speech Notes

John Roadley
Chairman, Global Dairy Company

New Zealand in the Global Market

Ravensdown Agribusiness Conference 2001
Convention Centre
Palmerston North

Thanks for your introduction and for your invitation to be here today. It’s good to be here in Palmerston North, home of so much of the New Zealand agriculture sector’s intellectual property and the training ground for so many of the dairy industry’s leaders.

I see from your programme that I am billed to speak to you today both as Chairman of Global Dairy Company and as a Farmer. I’m pleased about that. It’s as it should be. Global Dairy Company is proud to be a co-operative and we always will be.

We are now less than six weeks away from the scheduled passage of the legislation required to complete our industry merger, deregulate our industry and form our new co-op. In a very real sense, the New Zealand dairy industry stands today at the crossroads.

What New Zealand dairy farmers have built up over the years is well known. We have developed some of the world’s most popular dairy brands. Our marketing networks now span every continent and almost every country in the world. Internationally, we have developed a reputation for quality, reliability, food safety and animal welfare that is second to none. We’ve become the world’s ninth largest dairy company and New Zealand’s biggest industry, generating 20 percent of our exports and seven percent of our GDP.

In the season just completed – the last under our old, regulated structure – New Zealand dairy farmers have received a record payout from record production. The payout was up over 30 percent, putting an extra billion and a half dollars into the New Zealand economy. Production was over a billion kilograms of milk solids, and that’s equivalent to 1.5 million tonnes of dairy products. Strong production, a low dollar, high international prices and world-class manufacturing and marketing have delivered to our shareholders and to New Zealand.

Our industry, and our old industry structure, have had their critics. But, as an industry, I believe our performance stands up well against any other New Zealand business. In fact, it’s said that if the rest of the New Zealand economy had performed as well as dairying over the last decade, New Zealand would be ten steps higher up the global living standards ladder than we are today. We, the dairy farmers of New Zealand, are proud of that performance and what we have delivered to New Zealand. We’ve seen our personal living standards rise so that our families are significantly better off than they were a generation ago.

Let me also say that every dairy farmer in New Zealand would agree with the theme of Ruth Richardson’s address this morning: a record payout doesn’t have to be as good as it gets for the dairy industry. In the immediate term, we are going to have our work cut out to repeat the payout achieved last season. High international commodity prices and a low New Zealand dollar are not factors we want to depend on, and we have no intention of doing so. Our challenge is to take our industry to the next level of performance.

Farming in New Zealand is no longer a way of life. Our shareholders tend to be younger than in the past, their herds are tending to be bigger, and they are demanding returns on their investments as good as or better than they could get elsewhere. Global Dairy Company has to deliver to them, particularly in tomorrow’s deregulated environment where everyday we will be at risk of a competitor entering the New Zealand market, buying milk off us or off our suppliers, manufacturing it into dairy products and exporting them from New Zealand.

I believe that many people from outside our industry are underestimating the profound changes that are about to happen. I think Malcolm Bailey – reported in Monday’s Herald – is also underestimating those changes when he says he’s worried we may be an inefficient monopoly. To Malcolm, may I say congratulations on your election to the Shareholders’ Council – it’s now your job to monitor our performance on behalf of shareholders to ensure we do deliver excellent service and excellent returns.

Malcolm will also brief us next on the world our company sees as we look offshore today: a highly protected and profoundly distorted international dairy market. I don’t want to dwell on that today. All I have to say about prospects for trade liberalisation is that we stand behind the Government in its commitment to free trade and that we know it’ll be two-steps-forward, one-step-back with no silver bullet. The process of reform will be slow and painstaking. We always have to bear in mind that the idea that, all of a sudden, we could take by storm the high-value consumer markets of North America, Japan and Europe is sadly a pipedream.

The more immediate challenge and opportunity that I am focussed on is ensuring we respond well to the globalisation of our dairy industry. It’s the number one issue and what reform of our dairy industry this year has been about. With the world market so protected, only around six percent of the world’s dairy trade is accessible. There is only restricted access to the other 94 percent of the world market. That’s driving the acquisition of dairy companies already working in protected markets, and the alignment with them in joint ventures.

The other key driver for industry consolidation is globalisation by our customers. The top 25 food retailers in the world – our customers – are now involved in a dozen or more major acquisitions annually, and that’s up from just one major deal in 1995. There’s been an explosion of activity. The Economist magazine predicts that ultimately there will be just ten major food retailers in the world. One of them will be the American chain, Wal-Mart, which is forecast to achieve an annual turnover of over one trillion US dollars before the end of this decade.

There is a place in any industry for small, niche players such as Kapiti Cheeses or Tatua, and with export deregulation they have an opportunity to build their businesses. If they say that they can out-perform us in niche markets then good on them. But a customer like Wal-Mart is highly unlikely to be interested in dealing with a supplier that can’t service it globally. And, from the supplier’s point of view – our point of view – you must have scale to have any leverage with a customer as powerful as a Wal-Mart. That reality is driving dairy companies to merge, to acquire and to enter into joint ventures with one another.

And, as some of us become bigger, other dairy companies have to do the same. At the end of last month, for example, five medium-sized Swedish dairy companies announced that they would cooperate to compete with the local subsidiary of the giant Arla Foods.

All these factors are driving unprecedented consolidation activity among dairy companies globally. Rabobank reports that there is now one major merger, acquisition or joint venture in the global dairy industry every two and a half days. That’s the dynamism of the international dairy industry that we are part of. There are going to be fewer and fewer, but bigger and bigger companies chasing milk supply and customers. That’s why Marketing Professor Guenther Mueller-Heumann, of Otago University, said this week that the merger was “a victory of marketing common sense over absurd economic theory”.

There are huge prizes for those that can perform best in this environment where scale matters so much. Over the next five years, demand for dairy products is forecast to grow by about two percent annually, ahead of supply which is currently forecast to grow by only one percent per annum. Demand will grow slowest in high-income countries and fastest in South Asia, the Middle East, North Africa and – fastest of all – Latin America.

Globally, the fastest demand growth – in percentage terms – is expected to be in liquid milks that are, of course, almost impossible for us to export from New Zealand. There is also expected to be two to three percent annual growth in demand for whole milk and skim milk powders over the next five years.

In New Zealand, we have a solid platform to take advantage of this growth in demand and to be a player in the global consolidation of the industry. When our merger is completed, we’ll start out the ninth biggest dairy company in the world. The global marketing network, the brands and the reputation I mentioned at the outset will be left in one piece. We begin the next stage of our development already the lowest-cost producer of milk in the world. Our research and development infrastructure that has been built up over the years is world-renowned and it will be protected. We have excellent people, in New Zealand and overseas, and they are our number one advantage. The merger that we have been working on this year is about protecting those strengths and building on them.

First and most important, the merger maintains our industry under the ownership of New Zealand dairy farmers, and our shareholders demand that. I know that some of you here today have been critics of co-operatives, and it is true that there are some costs associated with our ownership structure. We have to invest more in staying in closer touch with our shareholders than other commercial enterprises do. We have to strongly justify the earnings we retain for reinvestment. But our shareholders regard these costs as a very small price to pay in exchange for eliminating the risk of them becoming mere suppliers of milk at the farm gate. The co-operative principle is non-negotiable and our performance over the last decade relative to the rest of the economy doesn’t suggest it has held us back. I want the word “co-operative” to appear in our company name when it is announced sometime over the next six weeks.

What the merger does is allow us to build on our existing platform as we move to the next stage of our development. The Business Case for the merger identified gains by the third year of $310 million a year. That’s around 30 cents per kilogram of milksolids above what would otherwise have been delivered to shareholders that year. One hundred and twenty million dollars of those benefits come from cost savings from removing duplication across the industry.

Beyond cost savings, we’re looking at $70 million in revenue gains from bringing together our manufacturing, marketing and distribution networks. We’ll be able to respond more quickly to day-to-day opportunities in the market and offer streamlined customer service. When our marketing arm receives an order, our manufacturing arm will be able to respond instantly.

Another example is our milk collection system, which will be more efficient. Where it makes commercial sense, the closest tanker will collect the milk and take it to the closest factory. We’re doing that already in advance of the completion of the merger, as much as the Commerce Act allows us to.

We’re also anticipating $100 million a year in strategic gains. We’ll be better able to implement our industry’s strategic plan because we’ll have clearer and less complex lines of accountability and we’ll be able to respond more nimbly to changing market conditions and opportunities. We’ll be one industry, united behind one board and one CEO, as we implement our strategic plan and consider international acquisitions or joint ventures.

Our executive team, led by our CEO, Craig Norgate, is responsible for delivering on that $310 million promise to shareholders. Craig has made a commitment to shareholders to get there as quickly as possible. Craig is an extraordinary New Zealander and the board has very high expectations for him and his team. In the last month, the early big-picture strategic decisions have been made about how our business will be organised. The first principle is that there must be no disruption to the service our customers enjoy in 120 countries.

Chris Moller will be Deputy CEO of Global Dairy Company and Managing Director of the new NZMP. The new NZMP will consist of the Dairy Board’s existing ingredients business, plus Anchor Products, Kiwi Dairy Products, Food Solutions Group, New Zealand Dairy Ingredients, Transport and Milk Quality and the Dairy Board’s Global Operations Division. It will be responsible for all our activity from the farm gate to our key customers. NZMP is aiming to exceed the supplier service standards of Kiwi and Dairy Group, and it is charged with delivering the benefits from integrating manufacturing and marketing. The one company will collect milk, process it and manufacture ingredients to meet the market demands of customers throughout the world.

One of those key customers will be the new NEW ZEALAND MILK that will consist of the Dairy Board’s existing consumer arm, plus Australasian Food Holdings – a company incorporating Mainland and Peters & Brownes. David Pilkington will be Managing Director of that business. We’re looking for him and his team to apply our investment in research and development to launch new, more profitable products, for the consumer market.

Overseeing these businesses will be the corporate centre, based at Auckland Airport. It will be as small as possible and as strong as necessary to drive overall performance across the group of companies. It will be responsible for ensuring shareholders’ expectations are met.

These are just the early decisions that can be made prior to the passage of the merger legislation. As I speak, the legislation is being considered by Parliament’s Primary Production Select Committee. It is designed to give effect to the merger and to the Regulatory Package agreed with the Government to address domestic market and other public policy issues. We are working with the Select Committee to ensure it gives full effect to those agreements and protects the industry’s intellectual property built up over generations. It is expected that the committee will report to Parliament on the 11th September and that the legislation will be passed soon after. We plan to be in business – with a permanent name – before the end of September.

I am enormously proud to be Chairman of both the Dairy Board and Global Dairy Company through this extraordinary process of bringing our dairy industry together into one, integrated co-op. We have made promises to our shareholders, to the Government and to all New Zealanders to perform. We have no illusions about the magnitude of the challenge ahead nor of the opportunities before us. We have every confidence in the ability of Craig Norgate and his team to face those challenges and take up those opportunities.

It continues to be “head down” for our company as we move towards our launch date. We are committed to making fast progress on delivering the promises we have made. We plan to earn the pride and allegiance of our shareholders and of all New Zealanders. We plan to earn it. Watch this space.

END

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