He wrote the note following the announcement a review would be done by the incoming Government.
More specifically, the DIRA review would likely look at the success of the New Zealand dairy industry in increasing the value generated from milk production and how farmers’ returns have fared over the period.
Dekker said the Government’s announcement indicates it will focus on the extent to which farmers, consumers and the NZ economy have benefitted from the regulatory structure.
“And whether the right regulatory, capital and other incentive structures are in place to optimise returns for the NZ economy.”
In a note to FNZC clients interested in Fonterra Shareholders Fund units he published a graph of the inflation-adjusted average dairy company total payout over the past 20 years.
The graph line moved around within a band of $5 to $9/kg without an upward trend as farmers and the Government would have hoped from the performance of Fonterra.
“It is hard to argue that the creation of a national champion in Fonterra has led to a sustained, material upwards impact on the farmgate returns received by farmers over the last 20 years.
“Partly, this reflects the nature of the (commodity based) farmgate milk price that dominates farmer payout.
“But partly it reflects the inability for the NZ industry, particularly on the weight of a doubling of milk volumes over that time, to lift the mix of its output to value-add sufficient to flow through into better co-operative payouts.”
Farmers had increased milk supply but not derived any material benefits from the push into value-add, Dekker said.
He suggests there are overlapping concerns in the milk volume versus value issue and environmental matters concerning the dairy industry.
It is premature to suggest an outcome from the DIRA review will be that environmental concerns will lead to a shrinking milk pool.
But Dekker wrote his note before Environment Minister David Parker said that might have to happen in some regions where nutrient limits are adopted.
Through new regulation the Government might try to get the industry to boost value-add rather than just chase more volume.
“The possibility of a shrinking milk pool is not immaterial for Fonterra’s embedded asset base and food service and consumer ambitions,” Dekker warned.
If Fonterra relies more on its offshore milk pools then access to capital from its shareholder base will be an issue.
The difficulties it faces overseas, especially in Beingmate, are in turn making it seemingly more attractive to supply an independent processor.
