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 its submission to the Dairy Industry Restructuring Act 2001 (DIRA) review, Fonterra sought the Government’s help in three key areas: removal of open entry provisions, greater certainty in the sunset provisions for the DIRA, and changes to the raw milk regulations so that Fonterra no longer need supply new processors that are primarily focused on export markets.
The Government is retaining the open entry and exit provisions but is allowing the co-op some wriggle room. The co-op may still refuse milk supply from farmers “in circumstances where milk is not compliant or unlikely to comply with Fonterra’s terms and standards of supply”.
More importantly, Fonterra won’t be obligated to collect milk from newly converted dairy farms.
On Fonterra’s concerns about sunset provisions, the Government has decided DIRA will be reviewed “on a four to six yearly basis to provide regulatory certainty”.
A major point of discontent among Fonterra farmers has been the requirement that they supply raw milk at a regulated price to independent processors.
Fonterra accepts that the raw milk regulations stimulated competition in the domestic retail market which is good for consumers.
But it strongly opposes the requirement to provide its farmers’ milk effectively at cost to new processors who are typically backed by foreign capital and existing global businesses.
These processors use this subsidised milk to compete with Fonterra and other New Zealand owned dairy businesses in export markets.
The Government is proposing to remove the requirement for Fonterra to supply regulated milk to any independent processor that has its own supply of 30 million litres or more in a single season. This will be welcome news for the co-op and its farmers.
Agriculture Minister Damien O’Connor says the changes will provide certainty for the dairy industry and ensure the sector can pursue sustainable value growth for the benefit of all New Zealanders.
He agrees the industry has changed considerably since 2001 when DIRA was introduced.
The changes announced last week won’t put all of Fonterra’s concerns to bed. However, they go some way to levelling the playing field in the dairy industry.
They are moves in the right direction.
