Recent Developments
Dairy
While New Zealand dairy farmers are widely regarded as being the most efficient producers of milk in the world, their net incomes have declined significantly over the last decade (refer Figure 1). Milk output has increased significantly, but this volume increase has been offset by falling commodity prices. Further, with 70 percent of New Zealand dairy exports unbranded, New Zealand remains highly exposed to fluctuations in international commodity prices.
Source: LIC Economic Suvey of Factory Supply Dairy Farmers (1997-98 and previous years)
The dairy products industry today is a global industry. The market is dominated by huge multinational retailers: the “hypermarkets” like Metro Group, Tengelmann, Carrefour and Le Clerc, each with revenues five to 10 times the size of the Dairy Board. These retailers source products from around the world. As Figure 2 below indicates, the Dairy Board must compete with many, often much larger, milk processing and marketing companies for the custom of these ‘hypermarkets’.
Like other global industries, the dairy products market is changing rapidly. Processors of dairy products are generally becoming larger, while marketers are quite diverse, with most using their supply chain networks to manage a variety of food products. Domestically, the New Zealand dairy industry has responded to change, mainly by mergers at the processor level and by off-shore investments by the Dairy Board (which now total $2.4 billion). However, the industry still faces major problems. Behind the declining trend in farmer profits are a number of underlying problems including:
· low returns on investment;
· poor price signals, leading to over production of milk;
· continued reliance on low-margin commodity exports; and
· excess politicisation of decision-making.
The industry’s current proposal to improve returns is to expand offshore through mergers and acquisition, while establishing onshore a “Megaco-op”. This “Megaco-op” would integrate the great majority, if not all, of the processor co-operatives and the Dairy Board into a single integrated company.
After dialogue and negotiation with industry leaders, the Dairy Industry Restructuring Act (DIRA) was developed and passed in September 1999. This Act addressed the key public policy issues relating to the proposed ‘Mega Co-op’.
In summary, the DIRA:
· establishes exclusive rights to export to designated (quota) markets for the ‘Mega Co-op’ for six and a half years, with a new allocation body established to allocate export licences to the designated markets on a phased-in basis thereafter;
· deals with taxation issues relating to the ‘Mega Co-op’, including transferring the Dairy Board’s available subscribed capital to the ‘Mega Co-op’;
· allows for the Livestock Improvement Corporation to revert to a farmer-owned corporation, the Dairy Research Institute’s assets to be transferred to a subsidiary company of the Dairy Board and ‘industry good’ activities to be funded through compulsory levies;
· converts the Dairy Board into a subsidiary company of the ‘Mega Co-op’;
· allows co-operatives that do not wish to participate in the ‘Mega Co-op’ to exit and take the fair value of their investment in the Board with them; and
· removes the statutory single desk arrangements.
The legislation only comes into effect if the merger is approved by farmers and authorised by the Commerce Commission by 1 September 2000. To establish the ‘Mega Co-op’ requires the merger of co-operatives accounting for at least 75% of the shares in the Dairy Board (effectively a merger of at least the two largest co-operatives, NZDG and Kiwi). A merger of the co-operatives requires support of 75% of the votes cast, with votes held by supplier-shareholders on a milk solids-supplied basis.
Apples and Kiwifruit
The fortunes of apple and kiwifruit growers have differed markedly in recent years. The incomes of apple growers have declined sharply with many claiming the industry now faces a crisis. Kiwifruit growers, on the other hand, have fared well in the last few years and are currently enjoying high prices and favourable international market conditions.
The current fortunes of the apple and pear and kiwifruit industries contrasts with the situation in the early 1990s when the apple industry was going through a strong phase but the Kiwifruit Marketing Board faced a financial crisis. Overall, neither industry has been a consistently strong performer.
In recent years the apple industry has been consolidating domestically, with average orchard size increasing and packhouses being rationalised. Much of this rationalisation was driven by the Apple and Pear Marketing Board.
The kiwifruit industry has been expanding. Onshore deregulation has seen growers benefit from reductions in cost and more responsive service with the rapid emergence of sizeable supply chain managers.
Both of New Zealand’s fruit Boards face substantial challenges with increasingly competitive international markets, consolidation of buyer groups, new entrants and other producing firms increasing their market share and competitors innovating in such areas as packaging, logistics, category management and customer relations. Their competitors, such as Dole, Fyfes and Del Monte, are not restricted in their ability to use the benefits of their supply chains and customer relations to forge strategic alliances and global marketing arrangements. In contrast, New Zealand’s fruit Boards are required to focus on New Zealand-grown pipfruit and kiwifruit respectively. The New Zealand fruit Boards also have limited sources of capital and are restricted in their ability to make international investments.
The Apple and Pear Industry Restructuring Act and the Kiwifruit Industry Restructuring Act were passed in September 1999. These Acts will establish, from 1 April 2000, the Boards’ commercial operations (ENZA and Zespri respectively) as companies with shares tradable among producers. Regulations made under these Acts:
· retain the near-sole right for ENZA and Zespri to purchase growers’ product for export, although other exporters can apply for export licenses;
· subject ENZA and Zespri to extensive regulations, including rules on non-diversification, non-discrimination, and information disclosure, and, in the case of ENZA, arms-length rules so it does not unduly favour its on-shore logistics business. These regulations are designed to protect growers while the export restrictions remain;
· establish new Boards (the Apple and Pear Board and the Kiwifruit Board) that are independent from the commercial activities of ENZA and Zespri and that are responsible for monitoring and ensuring ENZA’s and Zespri’s compliance with the regulations; and
· establish an independent Export Permits Committee for apples and pears that can grant licences for independent exporters so long as their exports do not undermine ENZA. In the case of Kiwifruit, the new Kiwifruit Board will decide on collaborative marketing applications and has the power to require Zespri to work with approved collaborative marketers.
Non-Trading Boards
As noted above, there are four non-trading boards (Meat, Wool, Game and Pork). Farmers in these sectors are under pressure with generally static or declining real incomes in the face of steadily declining commodity prices (refer Figure 3). Prices for wool growers have been especially depressed.
Source: NZ Meat and Wool Board Economic Service
In 1998/99, farmers were levied $71m to fund the non-trading Boards.1 The Boards’ funds were used to finance the Boards’ activities in such areas as generic promotion, advertising, research and development and administration.
At present, farmers have no direct say in how much they pay to the Boards or what the funds are spent on. Farmers’ influence is only indirect, that is, through their election of Directors to the Boards and views expressed at, for example, Annual Meetings.
In addition, while farmers are recognised as the underlying owners of the non-trading Boards, they:
· have no specific share interest in these Boards
· have no choice over how much they invest in the Boards; and
· receive any return on their investment indirectly, in the form of Board activities such as research and promotion.
The non-trading Boards have held substantial reserves on behalf of their owners, but these reserves have run down considerably in recent years (from around $650m in 1988 to around $250m now).
The non-trading Boards are each established and funded under their own individual statutes or regulations2. Earlier this year, the Producer Board Project Team developed, in consultation with the Boards and industries, a generic funding regime for the Boards. The regime would give farmers direct say in the level and allocation of the levies, tightly define the activities levies could be used to fund and impose greater accountability on the Boards for the use of the funds. This proposal is set out in a draft Compulsory Levies Bill. The Bill was not finally agreed to by the Boards and has yet to be finalised by the Government.
1 The
average sheep farmer paid $3,300 in levies in 1998.
2 The
Game Industry Board is established under the Primary Products Marketing Act.
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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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