23 January 2001

Government working on dairy industry proposal

A lot more work needs to be done, before the Government can endorse the proposed merger of New Zealand's two largest dairy companies and the Dairy Board, Agriculture Minister Jim Sutton said today.

Mr Sutton said the industry was asking the Government to override New Zealand's competition laws and clear the way for a monopoly in New Zealand's most important processing industry.

"That is big ask and, frankly, it is something we need to think long and hard about. There are very good reasons why governments legislate against monopolies.

"In the case of dairy companies, even though most farmers have had no real choice of processor, the fact that they have been able to benchmark company performance against competitors has been very effective in making managers and directors accountable.

"With a monopoly processor, farmers would in effect have to accept the claims of managers that they are efficient. Managers must be motivated not to solve every problem that comes their way by withholding more from suppliers and shareholders."

However, while cautious, the Government was not prepared to rule out a merger, Mr Sutton said. But instead, it would work on ways to retain dynamism and efficiency in a unified structure.

The Government's objective was to maximise the contribution to the New Zealand economy while protecting the interests of farmers and New Zealand consumers, he said.

"We recognise the industry's desire to make progress and the considerable efforts made to get to this point. We also appreciate the opportunities that such a merger might create, and the fact that, as a regulated industry, the Government is going to have a role in the industry's evolution.

"But, equally we must be conscious of the potential risks. The merger proposal would put all the industry's eggs in one basket. The dairy industry earns at least 20 cents of every export dollar coming into the country, so while dairy farmers were primarily affected by the proposal, it indirectly affected everyone in the country.

"The Government needs to be sure that whatever path it chooses is in New Zealand's national interest. Right now, with the information we have to hand, it is impossible to make that judgement."

He said the Government has proposed a joint working party of the industry and government officials to work through the issues, including contestability, fair entry and exit values, the unbundling of returns, and the future management of quota, and then report back.

Mr Sutton said farmers had a critical role, as ultimately they were the owners of the industry. They too needed all the available information so they could make an informed decision when the time came.

ENDS

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