The biggest change to New Zealand's dairy industry nears completion with the imminent passing of the Dairy Industry Restructuring Bill which, by early October, ought to have had its final reading in the House. The Bill clears the final hurdle for the merger of New Zealand's two largest dairy companies and the integration of the statutory dairy marketing board into one new huge company, Fonterra Cooperative Group. Fonterra will account for 96% of New Zealand's dairy industry, nearly 25% of all New Zealand export earnings and 7% of gross domestic product, and be the world's largest exporter of dairy products.
New Zealand's existing regulated dairy industry structure, under which the New Zealand Dairy Board has single desk powers to export New Zealand dairy products, has been under scrutiny for some years by government and industry participants. With the government signalling a move away from the single desk model, the major industry players have pursued a strategy of merging the largest dairy companies. In June this year dairy farmers overwhelmingly supported the merger of the New Zealand Dairy Group and Kiwi Cooperative Dairies, which enabled the integration of the Dairy Board. The support was dependent on the new structure maintaining the cooperative principles on which the dairy industry has long been based, and that the company remains owned and controlled by New Zealand dairy farmers. The government agreed to support the merger proposal and have legislated to allow for its implementation.
This is not to say the restructuring has not been without some criticism; one of the key features of the Dairy Industry Restructuring Bill is that it exempts the merger transaction from scrutiny and approval by the Commerce Commission, New Zealand's competition authority. However, to maintain local competition, one of the preconditions of the merger was that the New Zealand Dairy Group sells its 50% shareholding of New Zealand Dairy Foods, a company which has 40% of the New Zealand domestic consumer dairy market.
Already the benefits of the size and global strength of Fonterra are becoming apparent. In August Fonterra announced a number of joint ventures in the Americas with Nestlé in what is New Zealand's biggest ever offshore commercial deal. This is in addition to further arrangements with Dairy America to export their skimmed milk powder and the acquisition of two major companies in the Mexican dairy market.
Given the size of the merged entity relative to the New Zealand economy, its performance will be very closely watched.
James Aitken and Hamish Dixon