This is required in the Dairy Industry Restructuring Act (DIRA) under which their co-op was formed.
Or they might be better off acting according to another piece of age-old advice: if you anticipate the worst, you can only be pleasantly surprised.
There are provisions in the DIRA to ensure contestability in this country’s farmgate and factory-gate markets. The legislation intends they will expire when workable competition exists in the domestic dairy market. Many Fonterra farmers would argue that’s right now. They’re sure to be joined by others
whose views have firmed because of the difficult times their industry has seen recently.
The promised lift in international prices is yet to arrive and might be some months off, judging by sluggish GlobalDairyTrade results. Farmers heading into a new season with returns predicted to be little above last season’s abysmal levels can do nothing but pare back costs and ride out the downturn in the hope the medium and long-term prospects, which are still good, will arrive much sooner rather than later.
Many, seeking someone or something to blame, have returned to the refrain heard shortly after Fonterra’s creation, that the legislation which enabled it was flawed and the new co-op never got a fair go. The amount of milk it was required to sell to competitors, growing in strength all the time, at predetermined prices and the requirement that it collect all new milk supply formed a fierce pincer-like effect. Fonterra, it has long been asserted by these DIRA-doubters, shouldn’t be propping up companies where profits head offshore rather than back to the country growing the grass that produces the milk.
Their voices are joined by those who champion escalation of Fonterra’s value-add strategy, saying producing and processing more milk is just an added cost, not a benefit. Their mantra is the co-op needs to do more, much more, with less, as some of its small competitors have so successfully done.
These views certainly don’t tell the whole story – which it’s to be hoped the Commerce Commission will be able to unravel and present to all New Zealanders at the end of its next nine-month study.
Fonterra wouldn’t have left the starting blocks without the concessions put in place by DIRA.
The debate now needs to be focused on whether it’s time to relax those requirements, rather than trying to relitigate the past, something which will only end in frustration.
Most farmers will agree Fonterra has shown it can deliver the goods during the good times, but when prices drop has it equipped itself with the strength and scale its founding legislation was supposed to lend to it?
Farmers will have a variety of views, particularly as their co-op scrambles to increase processing capacity to smooth out bottlenecks which have occurred regularly during season peaks in recent years. Some will say it should have anticipated milkflow increases as high prices encouraged milk volumes in just one direction. Others will say there was no way in which the co-op could have predicted continuing weaknesses in other sectors, leading their counterparts to change land use and chase the dollar in exactly the way they themselves have.
Start-up companies have been building and expanding too, with farmers attracted by not having to buy Fonterra shares and some pretty good returns. Whether those are long-term supplier-processor relationships remains to be seen, but for many the ultimate test is trying it out for yourself.
The DIRA legislation always expected this would be the case. It was designed to make the newcomers as attractive as they have turned out to be so farmers had choice – and that meant Fonterra would have the necessary pressure on it to perform.
The big co-op has fought back. MyMilk hasn’t gone down well with all its farmers, and it’s hard to make a judgment without the figures as to how much South Island milk it has attracted that would otherwise have gone to its many competitors.
Fonterra’s intent can’t be mistaken – it believes by gaining this extra supply it can benefit all its shareholder owners, and that’s exactly what it intends to use this milk to do.
So what of the group not in existence when Fonterra was formed – shareholders of its units who rushed to buy and now may regret initial enthusiasm for such a cyclical industry? The investment they were enticed into suddenly seems less attractive but will regain some of its appeal if DIRA restrictions are ditched or diluted. Is this a good enough reason to do it; should it even be considered?
In many ways leaving DIRA alone might be the best option. Fonterra is resolute that its “three Vs” strategy is the correct one and its directors, including chairman John Wilson, face the ultimate test of shareholder election or rejection in November.
Strong performance is the best answer to any defectors in waiting.
Watering down DIRA’s provisions can’t run the risk of scaring off other overseas investors, particularly if their expertise is going to be of value to this country’s dairy industry.
The Government’s continued championing of free trade deals around the world also has to be considered.
What you see has got to be what you get, and Fonterra farmers may just have to grin and bear it. They voted for the proposal back in 2001, and while it’s easy to say so much has changed, the equations of supply and demand most definitely haven’t.
Returns may fluctuate, so may supplier loyalty, but unless there are exceptional circumstances legislation’s intent certainly shouldn’t.
