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.
In many respects DIRA still makes sense, but the farmers point out, quite rightly, that a lot has changed since DIRA came into force 17 years ago and now two issues need urgent attention.
DIRA was designed to promote competition, to give farmers the choice of who should get their milk. And today there are about 10 independent processors, about half of them overseas-owned.
Competition has been achieved: Fonterra’s market share has dropped from 91% to 82% and now the co-op must compete for milk. For example, Waikato can have tankers from as many as four different companies travelling its roads -- from Tatua, Fonterra, Synlait and Open Country Dairy.
DIRA now requires Fonterra to collect milk from any farmer who chooses to supply it. And that farmer may quit the co-op at will.
Similarly, new dairy companies may pick and choose which farmers they sign up. This has seen new companies enter the market so that their suppliers, knowing that if it didn’t work out they could return to Fonterra, had the confidence to move their supply.
Fonterra argues that this means there’s no longer a need for open entry and that if it continues too long it will wipe out the progress made.
Also needing review are DIRA raw milk regulations that require Fonterra to supply raw milk at a regulated price to independent dairy companies.
That makes sense in the domestic market, but when overseas-owned independent processors buy subsidised milk from Fonterra and then use it to compete with the co-op in overseas markets, something isn’t right.
Fonterra farmers correctly insist we need to be giving New Zealand-owned dairy companies a fair go, rather than see NZ dairy farmers subsidising foreign-owned companies. Fonterra farmers want to see as much value as possible captured from NZ milk for Kiwis.
Parts of DIRA need changing because times have changed. When Fonterra was formed it was nearly a monopoly, but now it must compete for milk.
Private companies get to choose their suppliers and Fonterra must be free to do the same.
