NZ's shortage of capital to process the increasing production of milk is being exposed, and foreign companies are taking advantage. Five out of the nine operating or proposed dairy processing plants will be foreign-owned or have significant foreign ownership.
It is allowing the opportunity for dairy expansion to proceed, which without foreign capital may not happen.
Although some of this expansion is taking market share from Fonterra through milk supplied under the Dairy Restructuring Act.
At what level are the competition conditions being met, and when will the Government decree to let the market decide who processes milk in NZ?
A $100 million milk-processing factory planned near Gore should be operating for the 2012-13 dairy season, but a shortage of local equity could force it to look overseas for financial backing. If that happens, five of the country's nine operating or proposed dairy processing plants will be foreign-owned or have significant foreign ownership reports The ODT.
Mataura Valley Milk director Ian Tulloch said the company is seeking a cornerstone partner to contribute 50% to 60% of the required funds, but the key was to find a compatible partner. In July, China-based Bright Dairy paid $82 million for a 51% stake in Canterbury's privately owned Synlait Milk, and this week Vietnam Dairy Products bought a 19.3% share in Miraka Ltd, which is building a $121 million processing plant near Taupo.
Open Country Dairy has Singapore's Olam International as its second largest shareholder while Nutritek Overseas, also from Singapore but with links to Russia, recently took over New Zealand Dairies based at Studholme in South Canterbury. There have been reports Nutritek wants to sell its plant and that New Zealand-owned Oceania Dairy Group, which has resource consent to build a factory in nearby Glenavy, was investigating buying the plant.
NZ Venture Capital Association chairman Kerry McIntosh said foreign investors could offer more than cash, such as distribution channels, branding and technical expertise. Fonterra still processes about 90% of New Zealand milk, but its market share has declined from about 96% when it was established in 2001, even though the volume of milk is growing. This year, Fonterra is required to supply 583 million litres of milk to 25 various companies, for which it receives the current milk price plus 10c a litre.
9 Comments
Isn’t it interesting that although these companies are largely from the Orient very little concern has been raised by New Zealanders about their investing in NZ’s dairy industry. Yet when legitimate concerns were raised about Natural Dairy’s bid to buy the Crafar farms, any and everybody that raised concerns was accused of being a xenophobic red-necked racist and told to STFU. Even the Royal New Zealand Herald got in on the act! Racist my a..e!
'At what level are the competition conditions being met, and when will the Government decree to let the market decide who processes milk in NZ?'
David Carter has shown by changing the goalposts on this issue this year, that as long as his ex pollie mates and large party fund contributing foreign investors are involved in the dairy industry he is happy to keep forcing Fonterra to subsidise these overseas owned companies at the expense of Fonterra farmers. It was believed that the original targets set out in the DIRA could be met in part, as early as 2011/2012. Synlait needs the Fonterra milk to make its new plant viable. May Wang will need it to make her UHT factory viable. Despite Westland Milk's support for Fonterra's stand dear old David simply changes the targets to accommodate his mates. In reply to Fonterras call for the criteria to be reviewed on the basis that it is happy to supply milk under DIRA for the NZ domestic market processors, Carter basically says, you can't have both - the legislation enabling the share trading to go ahead and a change to domestic only milk being supplied under the DIRA being considered this year. Carter will use this as a lever in the share trading negotiations as his mate Screech is so against either. Screech wants Fonterra's share to be reduced to 75%.
Any talk of competition for the NZ consumer is nothing but bollocks. How many of these companies receiving subsidised Fonterra milk compete in the NZ domestic market?
Carter has lost credibility with that turnaround. I know of Fonterra suppliers who have watched with disappointment the changing of the goal posts and who have been National supporters all their lives. If Carter hasn't changed the criteria before the next elections, where a processor who has their own supply base is not eligible to receive DIRA milk and after one year unless processors are in the domestic market they will not be eligible to receive DIRA milk, National will be getting neither donations nor votes from these disenchanted party members. Carter needs to stop being a limp wimp and grow some balls.
If JohnKey can make a decision overnight to not give ownership of Te Urewera National Park to Tuhoe, the same can be done regarding criteria for DIRA milk.
No other country forces a privately owned company to supply goods to their competitors at a government decreed price.
Any talk of trade backlashes etc is nothing more than bollocks. Too many overseas dairy producers e.g. Dairy Farmers of America, rely on Fonterra as either a joint venture partner or marketer. Leading Irish farmers now hold Fonterra up as the way they need to go to in order to create a viable Irish Dairy industry as it has become so fragmented and farmers are struggling to make a living.
If National gets elected at the next election and continue down this path of satisfying their ex pollie mates in the dairy industry by giving them legislated subsidies they may very well go down as the party that destroyed the dairy industry. Carter is urging sheep farmers to supply farmer cooperatives, at the same time doing his damndest to make the dairy industry structure worse than the sheep industry. No dominant company in the sheep industry has to supply their competitors with raw product - now why is that I wonder?
Bang on C O. The dairy industry seems in danger of fragmenting and heading towards the same path as the meat industry, helped by DIRA. I know its in place to placate trading partners but it seems to be incredibly generous to new entrants on an ongoing basis, they must be laughing all the way to the bank. Why is there not an finite period for new entrants to recieve the supply?
Casual Observer, Sheep Shagger.
You both seem keen - like Fonterra - on generating a political backlash against DIRA. I am trying to work out why.
Can you provide me with hard numbers on: The percentage of Fonterra shareholders' milk that is supplied to other processors under DIRA; How much of that milk is consumed within NZ and; The value of the subsidy you are tallking about in $ per Kg of milk solids and/or as a percentage of Fonterra's total milk payout?
Any explanation of how the subsidy arises would also be helpful.
Thanks.
Colin,
It is about what is fair and reasonable. If a competitor wants Fonterra milk it should be on a willing buyer, willing seller basis.
As a Fonterra supplier any decision the government makes in relation to Fonterra has a potential to impact on my bottom line. Their decisions relating to the DIRA are political decisions therefore they invite any backlash to be political. I am dead against being forced to supply my company’s milk to a processor at a price set by government, who has their own supply base and who will use that milk to compete with my company offshore . I am in effect a default supplier of that company, even though I choose not to supply it.
Other processors ordering of the extra milk can be turned on and off like a tap. I object strongly where we have the situation that Fonterra was in, in the South Island this Spring. It was being forced to give more than half its collected milk to its competitors. At no time should Fonterra be forced to have less than half of its own supply available to run its factories. This allows any competitor to take advantage of the early and late season prices (which are usually higher) by ordering their milk at these times. If at the same time it restricts Fonterra’s ability to take full advantage of their own suppliers milk at this time, then that is a definite advantage to Fonterra’s competitors.
John Penno has said that they need Fonterra milk for their new dryer. Why should I subsidise them? If they competently run a company then any expansions should be funded from profit/borrowings, not funded through the subsidy of a competitors milk. May Wang will be relying on Fonterra milk for her UHT factory. Most industry people know that the most profitable way to run a dairy factory is to run it at full or near to full capacity. Under the terms of the DIRA Fonterra is required to supply this milk ‘on demand’. Name any other company, anywhere in the world where this is forced on it by government.
Given the explanation below from Wikipedia of agricultural subsidy, perhaps you can explain how the forced supply of milk at a set governmental price to competitors is not a subsidy.
An agricultural subsidy is a governmental subsidy paid to farmers and agribusinesses to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities.
I won't be in a position to reply again until late tomorrow.
Thanks Casual Observer.
Delays are welcome. As far as I am concerned, the longer we take discussing this the more light will be shed and the better. You identify DIRA as a problem. I agree with you - it has been a real problem from day one. I would go further and describe DIRA as akin to a slow acting poison on the dairy industry - but I don't see that being for the reasons you are disparaging the political processes around the ACT.
The element of subsidy involved in Fonterra providing milk to other processors was not intentional, had a purpose and is I believe relatively small compared to some of the other subsidies flowing from the Act. I asked for the numbers I mentioned above so we can all gain some understanding of the range in scale of the disparate issues surrounding DIRA and the NZ dairy industry.
Sorry Colin I don't have the numbers on hand and with the farm under snow at the moment, and MOTH overseas, I don't have time to research the info for you.
For me it is about what is fair and reasonable and the DIRA is neither fair nor reasonable to Fonterra suppliers.
Formation of Fonterra was known at the time to be an action that would provide short-term gain but longer term a disaster. The decision was political and made against ministerial advice.
DIRA was necessary to allow the formation of the mega co-op, and to make that more fair and reasonable to those being disadvantaged. The major group perceived as being disadvantaged were NZ consumers of dairy products. Competing processors of NZ milk supply were also considered. The big winners were Fonterra shareholders. The big losers were NZ consumers.
We are now at the stage where that longer-term disaster is in process. Redemption risk being one of the clearest signs that Fonterra – or any co-operative – is failing. There is no shortage of other signs.
Fonterra is facing some big issues. Supplying limited amounts of milk to other processors is not one of them. Agitating against DIRA does though provide Fonterra a great smokescreen.
Look beyond the smoke and you may be able to identify some of the bigger issues - excessive debt, poor strategy, increasing world milk supply, leadership, marketing?
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