- Need for Change
- Single Entity
- “Two or More Companies” Structure
- Future of the Dairy Board
- The Government’s Role
- Next Steps
Current Industry Debate
Need for Change
38. The dairy industry is united on the need for change but not on the nature of that change. The primary focus of discussion is currently on the mega co-operative. However, if that merger fails, attention is likely to shift to the “two or more companies” structure.
Single Entity
39. The dairy industry has emphasised the perceived benefits of a mega-merger. The merger:
· fits with industry practice of co-operative ownership and consolidation; but
· is a high risk option as it puts all the industry’s eggs in one basket, relying on one corporate strategy and organisational form to achieve greater prosperity; and
· relies on internal mechanisms to substitute for effective governance by shareholders or competitors (given that non-participating co-operatives would be very small).
40. This mega-merger would meet the Dairy Industry Restructuring Act requirement for a merger representing at least 75 percent of milk supply.
41. The Commerce Commission will determine whether the mega-merger proposal has net benefits overall. However, key issues that it is likely the industry will have to address include:
· pricing distortions from the artificial mechanisms by which share value and the milk price must be established, if the direct link between shareholding and production is retained;
· productive inefficiencies and limited innovation implicit in a large dominant entity; and
· weak governance from dispersed shareholdings with no ability to aggregate or otherwise exit holdings.
“Two or More Companies” Structure
42. The most likely alternative if the mega-merger does not proceed is a “two or more companies” structure with the two companies open to competition. Such a structure would retain the advantages achieved to date by domestic consolidation while allowing unified selling to specific quota markets through the quota mechanisms in the DIRA (although adjustments may well be required to the transition period). It also leaves the nature of selling arrangements to other overseas markets up to the industry.
Future of the Dairy Board
43. A key issue to be worked through if the “two or more companies” model were adopted would be the future role and structure of the Dairy Board. Options include:
· a separately floated company;
· a joint venture of the co-operatives;
· a subsidiary of NZDG or Kiwi, with other shareholders bought out; or
· a physical separation of the Board’s assets between shareholders.
44. Each approach carries its own risks and opportunities in terms of preserving value, accessing future capital and clear governance signals. The choice should be made by the industry (rather than by Government) within normal legal frameworks so as to capitalise on the industry’s commercial knowledge and avoid distorting their incentives. Any of these options, however, would require legislative action to remove the existing special legislative framework.
The Government’s Role
45. There is a tremendous amount at stake for the future of the dairy industry in terms of export earnings and the need for a return on the immense level of scarce capital resources tied up in farms, processing infrastructure and marketing channels.
46. The Government is heavily involved in the industry at the moment and will remain involved as long as statutory protection is provided to industry structures. If these issues are not resolved now, they will come back. The industry recognises that the status quo is not sustainable.
47. In terms of the mega-merger, the key next steps for the industry are to resolve the terms of the NZDG/Kiwi merger and to submit a revised application to the Commerce Commission. If the Commission approves the application the existing legislation (DIRA) will come into effect (if farmers approve). The Government’s involvement in the dairy industry will then be to provide the generic legislative framework.
48. If the merger does not proceed, the Government will need to consider modifying the DIRA to facilitate some version of the “two or more companies” model.
49. The industry may suggest the Government over-rules the Commerce Commission. Any such action would have very serious negative consequences as it would:
· undermine the future basis of competition policy in New Zealand;
· create major uncertainty about New Zealand’s attitude towards the acquisition and exploitation of market dominance;
· encourage other industries to seek to bypass the Commission, risking politicising the competition policy process;
· possibly make New Zealand’s exports subject to anti-trust action in key markets while the resultant entity might still be regarded by trading partners to be a State Trading Enterprise in the WTO context;
· be unlikely to achieve the objective of facilitating the efficient use of resources across the economy and the growth of an internationally competitive export sector.
Next Steps
50. Regardless of the progress of the mega-merger, the Government will need to:
· act before 1 July 2000 to establish certification procedures for dairy products exported to the EU. This will require legislation to replicate provisions currently incorporated in the DIRA; and
· determine its position on the WAI 790 claim.
51. If the dairy industry agrees on merger terms and the Commerce Commission approves their application the next steps for the Government will be to:
· determine the future ownership of and access to the herd testing database and determine whether compulsory provision of data (and, therefore, Government involvement) is required; and
· establish Quotaco, the new quota allocation body (the constitution of Quotaco can only be finalised after the DIRA comes into effect).
52. If the dairy industry does not agree on merger terms or the Commerce Commission rejects its application, the next steps will be to:
· determine whether the industry can move further to achieve an acceptable application; and if not
· work with the industry to develop alternative ways to move forward.
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Sector Performance Policy
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