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Global Dairy Company - Questions And Answers

9 April 2001


GLOBAL DAIRY COMPANY - QUESTIONS AND ANSWERS


1. Why is the proposal not being put under the scrutiny of the Commerce Commission?

The dairy industry is highly regulated, with much of its activity currently outside New Zealand¡¦s competition law.

Consolidation of dairy co-operatives and other commercial pressures make this regulated structure no longer sustainable. In fact it is now imposing major costs on the dairy sector and the New Zealand economy.

The proposed merger provides a clear means of achieving a more normal industry structure that will operate under New Zealand¡¦s generic competition and business laws. Because the merger involves deregulation of the dairy sector ¡V our most import export earner - it is unique and complex.

The merger and associated regulatory package provide a way forward for the industry that will in time lead to greater contestability and efficiency. It¡¦s important to remember that the regulatory package will help reduce the risks associated with merger and that Global Dairy Company (GDC) will itself be subject to the Commerce Act.

2. Will there be improved market signals for farmers?

Yes. Both milk price and share price will better reflect market signals. The regulatory package requires open entry and exit of farmers to and from the company - meaning GDC has to get its prices right. For example if GDC got its share price too low and its milk price too high it could expect an influx of unwanted milk. Conversely, a milk price that is too low and a share price that is too high would see an exodus of suppliers.

The company will have to send appropriate market signals in order to ensure that the supply of milk from farmers does not exceed its processing capacity, but is still sufficient to meet its production requirements.

3. Should farmers fund GDC's expansion plans?

This is a question for farmers to answer when they decide whether to vote for or against the merger - it¡¦s their choice about whether they think GDC¡¦s expansion plans are realistic, and whether they want to use their capital for this. If other processors appear offering farmers a better deal, the entry/exit provisions mean that they will be able to withdraw their capital from GDC and supply milk elsewhere.

4. Why is there no alternative proposal?

The future of the dairy industry is first and foremost in the hands of farmers and the dairy industry. The government understands the merger proponents worked through a range of options before approaching the Government with this particular proposal. The Government considers this proposal to be an improvement on the status quo and has worked to improve the proposal from a public policy perspective.

5. Will there be job losses?

There may be some in the short term particularly in some head office activities like administration and marketing. In the medium to long term there could be more jobs in the industry as greater value added processing is encouraged, primarily as a consequence of the liberalisation of exports.

6. What are the implications for minorities such as Tatua, Westland, and independent cheese and ice cream manufacturers?

The Government is concerned that smaller companies in the industry aren¡¦t disadvantaged and will monitor the industry before and after the proposed merger. The regulatory package will ensure that there is a wholesale market for raw milk for alternative dairy manufacturers, despite GDC¡¦s dominance.

If problems arise,
„h the government will retain the power to regulate markets, if needed; and
„h the Commerce Act still applies.

There will also be many opportunities for smaller companies because of the following measures:

„h freeing up export licences in the transitional period, such that all existing dairy licence holders may export as of right;
„h the removal of the single desk after a one-year short transitional period.

7. Implications for Maori?

The government is aware that some Maori interests have number of issues regarding the merger proposal. Government officials have already had initial discussions with some Maori interests and will undertake broader consultation over the coming weeks.

8. Will the industry become foreign owned?

Decisions over ownership of GDC will rest with its farmer shareholders. It is not a decision for the Government. A key objective of the merger, for the industry and the Government, is to ensure the benefits to New Zealand are maximised. GDC¡¦s constitution establishes the company as a NZ owned dairy co-operative, and changes to this would require 75% support of the company¡¦s shareholders and the support of the Shareholders¡¦ Council.

9. Isn't this putting all our eggs in one basket?

GDC¡¦s share of the NZ milk production (95%+) does mean that the future of the dairy industry depends heavily on the success of its business strategy. The regulatory package has been developed to keep the pressure on GDC¡¦s management to perform. It will also allow the entry of new investors, spreading risk over time.

10. Will the Government enact legislation under urgency?

No. The two companies have come up with a proposal that will shape returns to farmers and the nation as a whole for years to come. It is important that it is properly considered by a Select Committee and that the wider interests affected are involved in that consideration.

11. Will the government cook up special deals with other industries?

The dairy industry¡¦s highly regulated structure is unique and unsustainable. The circumstances that have led to this merger do not exist in any other sector.

The Government¡¦s general approach is to work with industry sectors to identify the barriers to growth. In the case of dairy it¡¦s the regulatory framework. In the case of the wood-processing sector there are issues around infrastructure, transport, skills and marketing. In both cases, we¡¦re working with the industry to resolve those issues.

12. Isn¡¦t this inconsistent with the rest of the Government¡¦s work in business law?

The issue with this industry is that it operates under its own regulatory structure. The government¡¦s role in this has been to develop a package that will in time put the dairy industry on the same footing as other industries.

13. What is the regulatory package trying to achieve?

The regulatory package is designed to ensure farmers, other dairy companies and consumers are protected from GDC¡¦s prevailing market power ¡V the merged company will initially have 95 per cent of the country¡¦s milk supply. The package will also enable more processors ¡V such as the smaller cheese companies - to export their products.

It¡¦s a transitional package that will help the industry make the move from its present highly regulated and unsustainable state to a more normal regulatory framework. It has been designed so that as soon as there¡¦s contestability in the industry the package will terminate.

14. What will happen to New Zealand Dairy Foods?

The merger package will ensure that NZDF will be divested from NZ Dairy Group within a year of the merger to act as a competitor to GDC in the domestic market. Details of the divestment are still being worked through.

15. Does the Government support the merger?

The government is prepared to facilitate the merger subject to the protection of the public interest and the protection of farmers, minorities and consumers. The government¡¦s role in this is to ensure that if farmers decide GDC is the way to go, that the new entity is subject to normal competitive pressures, the industry works efficiently, and the interests of minority players, farmers and consumers are addressed.

This is not an endorsement of the business case ¡V that is a decision for farmers, not the Government.

16. What if farmers examine the business case and say no, this isn¡¦t what they want ¡V what¡¦s government¡¦s role/position then?

We will have to cross that bridge when we come to it ¡V the government does not want to prejudge the results of the vote.

17. What if farmers say yes and this new company fails?

GDC will be a private company. Its success or failure is in the hands of its shareholders, employees and management. Ultimately it is the company¡¦s shareholders that will enjoy the fruits of its successes and bear the costs of its failures.

18. What will happen to land prices?

It¡¦s important to recognise that there are a lot of influences on land prices, and the merger will not be the only factor. Dairy land prices are determined by:
- farm size and productivity ¡V the average farm is getting bigger all the time, carrying more dairy cattle each of which is producing more milk
- milk payouts, which are ultimately determined by international dairy markets
- other uses for the dairy land ¡V eg other types of farming, horticulture, even residential use (in some areas close to cities)

Because farm ownership has been tied to ownership of dairy co-operative shares, land prices have always implicitly included a value for those shares, but in the past purchase/ surrender prices for those shares haven¡¦t always recognised the real value of co-operatives. Under the merger proposals a fair price will be set for co-operative shares ¡V so the price of dairy land should be a more accurate measure of its real value.

19. What about quota ¡V who gets it? Is the proposal a risk to quota?

The quota stays government owned but will be allocated to GDC for an interim period. The long-term arrangements are to be determined but Government will ensure that Tatua, Westland or anyone else will be able to access quota. Benefits will be retained for the New Zealand dairy industry.

20. What incentives does GDC have to perform?

GDC has strong incentives to perform on the international dairy market where it faces aggressive competition. Disciplines on its performance in New Zealand will come from oversight by farmer shareholders and, as a consequence of the regulatory package, requirements on GDC to be responsive to capital and product market signals.

21. Implications for sharemilkers? Can they hold shares?

The government intends to ensure that all herd-owning sharemilkers are able to purchase dairy co-operative shares from their landowners (by agreement). This will implement a key recommendation of an industry wide working party established to consider sharemilker issues under the previous merger proposal.

22. Will dairy products in New Zealand be more expensive?

The planned divestment of NZDF will maintain competition in dairy products. No doubt large retailers, such as supermarkets, will further drive competition. Indeed, supermarket chains might secure their own supply of dairy products. In addition, anything GDC might do that could affect competition would be subject to the Commerce Act.

23. What will happen to the assets owned by the whole industry such as the LIC?

The Livestock Improvement Corporation and its national herd database will be established as a separate co-operative company, with a shareholding structured to reflect use. This is an asset that belongs to all farmers and sharemilkers, irrespective of whether they join GDC. The Government is determined to ensure that the benefits from these assets are enjoyed by the industry as a whole.

¡§Industry good¡¨ research and development will in future be funded through the Commodity Levies Act.

24. Why is the Government removing the single desk when the dairy Board has been so successful?

The single desk structure was set up when New Zealand had hundreds of dairy companies. Now that we have just two main dairy companies ¡V one if this merger goes ahead ¡V the single desk is actually hindering rather than helping the industry. The dairy industry is telling the government that from a commercial perspective the single desk is past its use by date.

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