What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
Fonterra chairman John Wilson says a lot has changed since the Dairy Industry Restructuring Act (DIRA) was enacted to launch the co-op in 2001.
“Today’s environment is so different,” he told a Northland Dairy Development Trust conference in Whangarei this month.
“Right now we are required to pick up milk from any farmer who is thinking about supplying milk.... If that farmer does not have great environmentl practices or is in an area that’s not great for dairying or has a highly fragile ecosystem, we are still forced to pick up that milk,” Wilson says.
“That’s not the right answer so regulations need to be changed to address that…. Unfortunately they were not changed by the previous government and we hope we can have a constructive conversation with the current government.”
The Labour-led coalition government has signalled a comprehensive review of DIRA.
It is also introducing a bill to prevent the expiry of the efficiency and contestability provisions of the DIRA in the South Island. This will mean the current regulatory regime will continue in place; it is due to expire on May 31 this year.
It includes the open entry-and-exit clause under which Fonterra must accept any application to become a shareholding farmer in the co-op, and accept supply of milk from that shareholder. Shareholding farmers can also readily exit from Fonterra and supply another dairy processor should they wish to do so.
Fonterra also has to sell up to 20% of its milk to other processors each season.
DIRA was set up to manage Fonterra’s dominant position in the NZ dairy market, until sufficient competition emerged. It contains automatic expiry provisions that were triggered in 2015 in response to the co-op’s reduced market share in the South Island.
More milk available
Fonterra says rival processors will need a competitive offering to catch milk from its suppliers.
Chairman John Wilson says farmers have seen processors come and go over time.
“We went through a period of five years until two years ago when our milk production grew at 5% average per annum.
“That’s a lot of milk growth; there has been a lot of milk available so other processors have been taking a slice of a growing pie. We strongly believe that environment has changed.”
