- 4.1 - Introduction
- 4.2 - Promotion of Industry Change
- 4.3 - Promotion of Processing and Structural Efficiencies
- 4.4 - Preservation of a Single Seller Market
- 4.5 - Industry Development
4. Public Benefits
4.1 - Introduction
We have been provided with a copy of a document titled "Business Case for Global Dairy Co Ltd: Executive Summary", in which is an outline of the sources of the $310 million dollars in benefits that are claimed to be associated with the merger. The claimed costs savings and revenue enhancements are summarised as follows:
Annual cost savings in the order of $120 million. These savings arise from elimination of duplicated facilities and activities and are achievable from the first year of GDC. But the immediate impact of the savings is offset by one-off costs of around $100 million.
Annual revenue enhancements and productivity improvements in the order of $70 million. These benefits are expected to arise from the second year of GDC and represent enhanced economies of scale and scope if manufacturing activities are integrated with marketing and distribution functions.
Further benefits arise because the merger will enable the harnessing of synergies between different parts of the industry, provide fresh strategic impetus and broaden options to exploit new market, technology and biotech opportunities. The estimated impact on GDC's net earnings is an additional $120 million per year from the third year of the merger.
While this outline is couched in the most general terms, it is possible to offer some high level comparisons based on the views expressed by the Commission in 1999.
4.2 - Promotion of Industry Change
In a paper presented to the Commission in support of the merger the NZIER suggested that the 1999 proposal would promote industry change by providing for a cessation of the bundling of payouts to farmer/shareholders and by facilitating the integration of manufacturing and export marketing. The Commission was not convinced that the merger was necessary to obtain these benefits, and in respect of industry change it assessed the benefits of the merger as being in the order of $5 million - $15 million.
4.3 - Promotion of Processing and Structural Efficiencies
The annual cost saving claimed in the NZIER paper supporting the merger proposed in 1999 claimed benefits of $136.6 million as a result of the potential to reduce duplication in ancillary facilities, plant production flexibility and rationalisation. Of these claims, the Commission accepted benefits in the range from $21 million to $41 million against the status quo, and $46.5 million to $71.5 million against the deregulation counterfactual.
We note that annual savings of $120 million per year are claimed in the statement cited above, and thus that the industry claim for public benefits under this category has not changed materially. In the absence of further information, we must therefore conclude that the benefits accepted by the Commission under this heading are unlikely to increase.
4.4 - Preservation of a Single Seller Market
In addition to the claimed benefits of the GDC proposal noted at the beginning of this section, the "Business Case ... Executive Summary" at page 2 claims that if the single-seller framework was replace by two major competing New Zealand companies, then "The experience of NZDG, NZDB and Kiwi suggests that market premiums of around $110 million annually would be lost ...".
The premium associated with single desk selling was considered by the Commerce Commission. It noted that the Dairy Board claimed that outside of the quota markets it is able to wield market power in some product and geographical markets by virtue of its market share and the premium associated with New Zealand dairy products. It is argued that these market premiums would be eroded as two competing New Zealand companies attempted to increase their share of the markets in which those premiums above the world price are extracted.
The evidence that such premiums exist is contentious. In a study commissioned by the Dairy Board, the NZIER (1998) estimated that the premiums totaled $40 million per annum. In a critique of the NZIER study commissioned by the Producer Board Project Team, Economics and Law Consulting Limited (1998) demonstrated that the conceptual basis of the NZIER study was implausible and both the methodology and conclusions were flawed. There is nothing in the material provided as part of the GDC proposal to indicate the basis of the claim of single desk premiums of $110 million.
In considering the evidence in 1999, the Commission was reluctant to endorse the claim the market premiums are obtained through single desk selling, and it did not agree these premiums would be lost completely if there were two or more competing New Zealand exporters. The Commission assigned a range from $0 - $20 million for the public benefits associated with the retention of single desk premiums. Despite the higher amount claimed by the proponents of the GDC merger, in the absence of quality empirical evidence in support of the amount claimed, we consider it unlikely that the Commission would recognise public benefits larger than the $0 - $20 million range.
4.5 - Industry Development
In its August 1999 decision the Commission considered a range of claims about intangible benefits associated with a consolidated dairy industry. These included the benefits of the adoption by the industry as a whole of best practice from each co-op, the structure for funding industry good research (from Dairy Board revenues), the benefits to New Zealand of having a large multinational firm based in this country, and the claim that the industry could grow its revenues from US$4 billion to US$30 billion in a relatively short time frame. As the Commission noted, there was no evidence that this growth in revenues of the merged company would produce tangible benefits for farmers or consumers in New Zealand. The Commission declined to include any tangible benefits associated with these factors in its analysis.
The GDC proposal contains little detail on any of these factors. The supporting material provides a high profile to the fact that GDC would be the 14th largest dairy company in the world, and that it would retain New Zealand ownership of the organisation. It is not, however, clear, that there are any tangible public benefits associated with these factors. In respect of these factors we therefore see no reason to expect that the Commission would find tangible benefits in the GDC proposal.
Contact for Enquiries
Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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