Rt Hon Sir William Birch
Minister of Finance

Hon John Luxton
Minister of Food and Fibre

14 July 1999
Press Statement
For Immediate Release
EPOCH-MAKING CHANGES PROPOSED BY DAIRY INDUSTRY

Legislation to provide a transition path for the dairy industry to respond competitively to world market opportunities will be introduced in Parliament today, Finance Minister Sir William Birch and Food and Fibre Minister John Luxton announced this afternoon.

“This is an epoch-making event in the history of the New Zealand dairy industry which, with an annual turnover approaching $8 billion and exports of about $5 billion a year, plays a massive role in the nation’s economy,” they said.

“The dairy industry, responding to Government invitations to consider means of creating more wealth for the industry and the nation, and to its own world opportunities, is proposing to amalgamate most of its co-operative processing companies into a single large processing and marketing company.

“That enterprise, known as the MegaCo-op in industry circles, would be New Zealand’s biggest commercial company by a significant margin. That would provide the critical mass necessary for successful global operations, but on a commercial rather than a regulated basis.

“The MegaCo-op could process more than 95% of the industry’s milk, and that prospect raises some issues,” the Ministers said.

“Issues affecting competition in our own domestic market are a matter for the independent judgement of the Commerce Commission. The legislation introduced today is subject to authorisation of the industry proposals by the Commerce Commission.

“The industry will put the MegaCo-op proposal to dairy farmers. If 75% of voting dairy farmers who supply a co-operative processing company say yes, that company becomes part of the MegaCo-op.

“Without Commerce Commission authorisation and a favourable farmer vote and Parliamentary approval of today’s Bill, the plan cannot proceed. If those approvals are in fact obtained, the industry wants the MegaCo-op to be up and running as early as possible after the merger vote but in any event, no later than 1 September 2000.

“The current regulatory framework for dairying is based on a statutory board with an export monopoly. The industry’s proposal requires a more competitive commercial entity owned by dairy farmers.

“From 1 September 2000, except in specified markets with quotas and similar restrictions for butter and cheese (USA, EU, Japan and Canada), exporters will no longer be bound to market dairy products through a single-desk system.

“They will be free to choose how and through whom they market. The significance of that is evident if you recall that products earning 84% of the industry’s sales revenue are sold outside these quota and similar arrangements.

“It is also worth noting that quota applies basically only to commodity products, and not to higher added value products. To the extent that the industry moves much more strongly into added value, quota markets will have declining importance in the future.

“Competitive international dairy marketers, faced like us with quota restrictions on entry into key markets, have taken an aggressive added-value route to overcome the resultant road block. The same solution is available to New Zealand processors.”

The Ministers said dairy quota, owned by the Government, was presently assigned to the Dairy Board which had made large offshore investments in brands and distribution. Under the new plan, the Dairy Board becomes a 100% owned commercial subsidiary of the MegaCo-op.

“To avoid loss on Dairy Board investments overseas, the MegaCo-op will, for the first 6½ years, have exclusive rights to specified EU, US, Japanese and Canadian butter and cheese markets. Exclusivity phases down to zero during the ensuing four years.

“Those arrangements have, however, been planned and agreed on a basis which will ensure that, at every stage, the benefit of quota arrangements will pass through to the dairy farmers of New Zealand.

“If farmers vote in favour of the merger plan, shares presently held by dairy farmers in their own co-operatives will be exchanged for shares in the MegaCo-op. The farmers will own the MegaCo-op directly. The co-operatives merge into the MegaCo-op. The Dairy Board is reconstituted as a commercial company, and becomes a 100% owned subsidiary of the MegaCo-op.

“The Government and the industry have agreed that farmers exiting from the MegaCo-op should be able to recover fair value for their share of the value of the MegaCo-op. The industry proposes that the MegaCo-op establish:

· A commodity milk price
·
· A ‘Q’ class of shares covering returns on quota, which would be freely tradeable among farmer suppliers
·
· And an ‘A’ class share covering all other returns, tradeable among farmer suppliers within a range linked to volume of milk supply.
·
“That approach, instead of the present 1:1 ratio between shareholding and milk supply, will create a market to some degree, which will help farmers to receive fair value on entry and exit from the MegaCo-op,” Ministers said.

“The Commerce Commission will be reviewing the adequacy of these and other provisions covering competition issues. Industry leaders assure us that farmers will have intensive opportunities to ask questions at nation-wide meetings to discuss the plan. Assurances have also been given by the industry of rigorously fair treatment for smaller and non-participating co-operatives.

“The Government’s aim has been to stimulate the industry to find improved means of wealth creation for dairy farmers, the rural community and the economy. This is the start of a very important process of transition in New Zealand’s biggest industry,” they said.

“The Bill introduced today will, from next week, spend about six weeks in front of a Select Committee of Parliament, to permit dairy farmers, processors and any other party to make submissions,” the Ministers said.

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