Fonterra wants to maximise commercial returns for farmers, while Winston Peters wants to manage geopolitical risks and strategic interests of New Zealand broadly

It can be hard for New Zealand to accept its place in the world. Early Māori society was self-sufficient but the British colony was formed to provide raw resources to the empire. It was built to be Britain's farm. 

This model has been modernised, we now sell to various countries and have some value-add exports, but most of our foreign income still comes from sending lightly-processed dairy, meat, and timber offshore.

Fonterra’s decision to sell its consumer brands—such as Anchor, Mainland, and Kāpiti—to French dairy giant Lactalis is an acknowledgement of this reality. And the $4.2 billion purchase price shows how much more valuable these brands are in other hands.

In theory, consumer products are a chance to expand margins and move up the value chain but it hasn’t worked for New Zealand’s cooperative. It makes higher returns in its plain, old commodities business. 

Lactalis is willing to give Fonterra billions of dollars, which it can return to farmers and reinvest in its more profitable divisions, to secure a position in the Australasian and Asian market and access to a steady supply of high quality Kiwi milk. It’s a win-win deal, really. 

But New Zealand First leader Winston Peters hates it. He wrote a letter to farmers on Friday asking them to reject the offer and keep the brands in Kiwi hands.

“The decision is yours. We caution you to think not of the short-term sugar hit from selling, but to the long-term security for their children, grandchildren, and country.”

Peters worries the French buyer may soon stop buying New Zealand milk to make the products, or start diluting the Kiwi dairy with cheaper ingredients to cut costs.

“That’s it. Milk split. Fonterra will be a wholesaler. Lactalis will control your brands.” 

He also hinted at retaliating with regulation. Fonterra controls 85% of milk supply and is required to offer a certain amount to other processors, but those rules have been relaxed as competition has increased.

“If this deal proceeds, then perhaps we need to revisit the regulatory environment … Without the value-add of consumer brands owned by Fonterra, it is reasonable to ask whether Fonterra should sell more of its milk to other producers so they can develop New Zealand products.”

“Lactalis need to know that the preference position they seek to buy and exploit is not guaranteed,” he warned. 

Done deal

Farmers will almost certainly vote to approve the deal, which would see them paid $2 per share tax free. Peters will be unlikely to persuade many to forgo several hundred thousand dollars cash today and higher annual returns in the immediate future. 

Not everyone will vote for it and not all farmers support it, but the cooperative only needs a majority vote and is expected to get 75% or more. Lactalis is paying top dollar, after all. 

But if it is such a good deal, why is Winston Peters’ so worried about it? It seems to be partly sentimental, as he references Anchor’s 1886 founding date, but it is also strategic.

Fonterra and its farmers contribute about 3% of New Zealand’s annual GDP and 25% of exports alone. It is a structural pillar in the economy, and Peters doesn’t want it to be entirely at the mercy of foreign distributors.

While it already sells 85% of its dairy products to large multinationals, it does have its own international brands which could be scaled up. In theory, this provides negotiating leverage to stop buyers from pushing too hard on prices.

NZ First hates being in thrall to corporate interests and foreign ones in particular. It is by far the widest ideological gap between the NZ First and the rest of the coalition. 

He’d willingly give up some commercial profit in return for long-term strategic control of what he sees as New Zealand’s interests, even if that means nationalisation or strict regulation.

Winston Peters has more common ground with the Green Party when it comes to state ownership and industrial policy. His party is to the left of Labour on these issues. 

But, much like wide-leg jeans, state capitalism is an old idea that has swung back into fashion. 

Security over efficiency

Neil-Paviour Smith, chief executive of brokerage firm Forsyth Barr, told The Mood of the Boardroom recently that energy, security, and geopolitics were the “new ESG”.

Another finance boss said: “Free global market ideology no longer fits and local initiatives might now have to be considered. We don't like this new reality but geopolitics intervened."

These won’t be NZ First voters but were gesturing towards the party’s ideas. The United States, China, and (to a lesser extent) the European Union are all embracing industrial policy and protectionism. Economic security has dethroned economic efficiency.

China wasn’t mentioned in Peters’ letter to farmers but it may be on his mind. Divesting the consumer brand increases Fonterra’s exposure to China from 28% of earnings to 34%. 

The New Zealand government has been encouraging business to diversify exports and reduce the risks of becoming collateral damage in the power struggle between the US and China. 

There has also been a considerable diplomatic effort put into opening doors for Fonterra brands in international markets. Some of that taxpayer funded value is baked into the assets being sold to Lactalis, although ‘NZ Inc’ is being paid handsomely for it.

It makes complete commercial sense for Fonterra to sell its consumer business, but it is more ambiguous from Winston Peters’ economic security perspective.