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Dairy Announcement Press Conference Transcript

Transcript of Agriculture Minister Jim Sutton's press conference on dairy announcement, 21 December 2000

Jim Sutton: Welcome everybody. I suppose I've got to say that I'm sorry to have received a note from Graham Fraser this afternoon, saying he's resigned as chairman of the Dairy Board. On the other hand, I've got to say I'm delighted, as Graham is, that the industry has got to the point where it can come back to government and united with a proposal to change its structure to take it into the future, and that is good news. It has taken them quite a long time to get to this point. I know how hard it's been and what an effort it has taken to get to this point. I'm looking forward very much to the work government has to do now with the industry in order to move forward.

Kent (NZPA): Minister, the directors indicated today that they don't intend to go through the Commerce Commission at all on this one. How should there be one law for the dairy industry and one law for the rest of New Zealand business?

JS: That's a pretty good question. The industry has asked and the government is challenged to take the industry from a scheme of law that was designed to prevent a very fragmented industry from falling apart to a new scheme of law designed to prevent a monolith falling into the temptation of abusing it's monolpoly powers. That's a radical change. It's a very big ask and government has a lot of work to do before we can decide in the public interest what is the best course of action.

Barry (IRN): Do you have an idea what the preferred course of action is now?

JS: Obviously industry's preferred course of action is that government enact enabling legislation that will take them around the outside of the Commerce Act. The Government on the other hand must consider the public interrest. The Commerce Act and the rules of public law have been set up to weigh the public interest against the ambitions of the corporates who would wish to take action that on the face of it would reduce or eliminate effective competition. In this case, it is an extraordinarily important part of the economy. Now, there is no simple answer to the questions that arise from that. Officials and ministers have already started work on that and there will have to be a lot of communication between government and the companies in order for us to make a decision. And I expect we'll be in effect in negotiations. This isn't a take or leave it proposition the indsutry has put to government; it is their plan. The government has to look at it from the public interest point of view and decide whether it is our plan as well.

Duncan (TVNZ): You're going to have to change legislation in the new year?

JS: Oh yes, this is an industry structure very much designed by legislation and to change it to what is proposed will take legislation as well.

Astrid (TV3): How likely is it that the government is going to be able to pass legislation to get this going in June?

JS: It is a very ambitious timeline. If you try writing it down on a calendar, on the face of it, it's impossible. But I don't consider that to be all important. Government clearly won't be dictated to by the timeline that's implied by this request. We'll go through it thoroughly. I know some of the officials sighed as their summer holidays went down the gurgler when they heard about this on Tuesday evening. I thank them for their willingness to work while the rest of New Zealand goes on holiday, except for the farmers of course. The dairy farmers will be working too.

Astrid: How much political will do you think there is outside the government for this?

JS: I don't think there are too many party political hurdles. Last year, when there was a mega-merger proposed and legislation for that was put to the House, there was pretty strong support, not quite across the board, but right across the mainstream of NZ politics. I suspect that will still be there. The real issue is not whether we can get the support of MPs, but whether we can be convinced that this is in the public interest, and that is the main issue that government has to grapple with.

Kent: Minister, do you accept that it is not a good look if industry apparently can't answer the 48 questions they were asked by the Commerce Commission on their last outing and they're effectively just going around the Commerce Commission, rather than trying to meet its requirements?

JS: That's fair comment, but on the other hand, it's fair to say that this industry is almost unique in this country, in its scale and from the point of view that the overwhelming majority of its business is conducted offshore. It would only be the 14th largest dairy company in the world. They believe with some justification that if they are to have the future they are capable of and may aspire to that they need to benumber one or number two in their key markets. When you start off as Number 14, when you're all together, then you've got a challenge in front of you. We appreciate this and we can't allow the NZ domestic market, the tail if you like, to wag the NZ dairy industry dog. That's not to say the principles of competition law aren't important ? they are tremendously important. We move from a situation, as I said before, when the law was designed to stop an almost fragmented industry from falling apart completely to a new regime to where the law will have to prevent an industry with a near-monopoly, and a vital industry, from falling into the temptations of abuse of that monopoly power. We all know what they are: that everytime inefficiencies arise, there's a challenge to the profit line, the problem is solved by reducing the payment for the raw materials to the primary producer. That's one risk. The other risk is that the interests of the consumer do not get proper attention now. I think the Commerce Commission's most difficult test not the domestic consumer ? that can be resolved by divesting sufficientoperations to provide competition in the domestic market and making sure that they have access to the raw material at fair prices. The difficult issue is the market for raw milk, where the farmers sell to the processor. If there's only one processor, as then the bargaining power is very uneven. I think the apple producers could attest to that at the moment.

Barry: How can a monopoly be in the best interests of the consumer?

JS: Well, if ways can be found to ensure the disadvantages of monopoly can be mitigated effectively, and if a company is as big as we can put together in New Zealand, which means the whole industry, can operate more effectively in world markets, then the benefits for the NZ economy might well outweigh the risks. But you're starting to get into technical issues, issues where a lot of research needs to be done, a lot of advice given and taken, and hard decisions made. That is going to be what government and our officials are going to be doing over summer.

Barry: Six months ago, you called it a shotgun wedding.

JS: When we took the shotgun away, the wedding party broke up. But lo and behold, what was to have been an arranged marriage has got together on a voluntary basis. This is a triumph of romance!

Patric: The companies have said they won't put this to a shareholder vote till they have an indication of Government support. They want that vote to happen in March. Are you confident you'll be able to say yea or nae at that point?

JS: No, I'm not. But we'll be working conscientiously. I think we'll know long before the vote is taken what the attitude of the dairy farmers is. We know that the previous proposal for the mega merger was heavily supported by farmers and that was before a lot of the issues had been effectively tackled ? issues like the valuation of the two big companies for purposes of merging. Now they haven't come out with valuations of the companies, but they have come out with an agreed process for determining the valuation for merger purposes and that is a huge step forward and indicates the seriousness with which the company directors have taken it and the pressure which they have been under from rank and file dairy farmers.

Kent: What indications have you had from the Green Party MPs on their views on these kinds of deals? Govt can't push this legislation through by itself, you'll need other support.

JS: Absolutely. I haven't as yet had any discussions with the Greens, or in fact any other party apart from our Coalition Partner. I've had this information in confidence for the last few days and I've treated it as confidential. I know it's been leaking from every pore, but it hasn't been leaking from me!

Astrid: How likely is it on the face of it you are actually going to be able to accommodate all the industry wants?

JS: I don't want to anticipate the endgame, but we take this very seriously. The industry understands the government's requirements from this. I think they think the government's role is a bit easy. Perhaps government has taken indudstry's challenges pretty lightly too. All I can say is that we will go into this very thoroughly and officials have already started on that work.

Kent: What weight will you give to the need to ensure that the company performs to some benchmark seeing it won't have a rival to keep it on the straight and narrow of economic efficiency?

JS: The scheme proposed by the big companies does include the removal of the statutory single desk so there will be at the very least contestability, the opportunity for a new player to come in. Let's say, for example Nestle can build a factory and put an advertisement in the paper saying they'd like to buy milk and start to sign up farmers. Now, there are pretty high entry barriers because building world competitive dairy processing factories takes a lot of loot, but it won't be impossible. I would expect, even right from the start, for there to be small companies contesting niches in the marketplace. Tatua Dairy hasn't indicated their response to this yet, but their response to the previous proposition was that they wanted to stay out of it and they wanted commercial law that ensured they werren't beaten up by the mega-coop. I'm not sure that their attitude is likely to have changed much and they are an important though small part of the industry. I would anticipate that other small companies would spring up, servicing particular niches. A couple of weeks ago, I opened a dairy factory in Invercargill that will make Movenpick ice cream for the entire Asian market. Now that isn't part of the mega-coop.

Kent: the Government would have no problem if Nestle or Parmalat were to buy up Dairy Foods and use that as a basis for setting up an operation in New Zealand?

JS: Government hasn't thought about that yet.

Catherine Harris (RNZ Rural News): Are you looking to amend the current Dairy Board Act or are you looking at new legislation?

JS: In the last attempt at this job, there was the Dairy Industry Restructuring Act. I imagine there will be something of the same again, provided we reach agreement.


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