TEN years ago the Australian and New Zealand dairy industries were about the same size. Both produced about 11 billion litres of milk a year.
Since then the NZ industry has almost doubled, to close to 20 billion litres of annual production; Australia has gone backward, shrinking by almost a quarter.
More potently, almost all that NZ production is sold into the export market in the form of higher value added milk powder, butter and cheese. Australian exports in contrast have fallen.
The bottom line is that NZ now has close to 35 per cent of the global dairy trade – five times our share. Ten years ago, we were about equal.
The battle for Warrnambool Cheese and Butter is a fundamental inflection point, not just for dairy, not just for rural industry more widely, but for the entire nation.
Bluntly, Australian dairy has two alternative futures. Milk powder in particular can become the «iron ore» of tomorrow’s dairy industry – with us selling rising volumes at higher prices into Asia.
Or we can let dairy decay into a version of our car industry. Inward looking, shrinking, uncompetitive.
It would be extraordinary if we chose the second course. Unlike the car industry, the Australian dairy industry actually is globally competitive.
Indeed, it could even grow through a strong Aussie dollar. That’s a rare attribute. Not many Australian industries could say that.
Further, NZ has actually provided us with a road map. There’s nothing that renders dairy intrinsically more efficient across the ditch. The grass is really only visually greener over there.
The divergent paths taken by the two industries has been a matter of deliberate choice. By the players. By the regulators. And by government.
The battle for WCB, which must inevitably spread to one of its suitors, Bega Cheese – and indeed, already has, with the move by NZ dairy giant Fonterra, which IS the NZ dairy industry, to buy a 10 per cent stake in Bega – actually forces us to face those basic choices.
Critically, it is not just about WCB and Bega. It is going to spread – positively or negatively; our choice – to envelop the entire domestic industry.
Our choice is whether we emerge from all this likely turmoil and corporate change with an industry that can grow into a global player, precisely at the point in time when global demand is going to run significantly ahead of supply growth, and do so for decades, in a replay of coal and iron ore.
Or we choose an industry that continues to shrink. We actually have positive, exciting options. We also have some very bad choices.
The decisions that need to be made, must be based on an holistic understanding of the dynamics of dairy locally, of the opportunities globally, and the reality of industry structures in other competing countries.
There are two critical elements to understand about the industry. The split between the co-ops and the international corporate players; and the split between fresh milk and dairy product: cheese, butter and powder.
Everyone’s focus – consumers, regulators, politicians – is on fresh milk. Is $1-a-litre good for consumers or bad for farmers? How does it play into the bigger issues about the power of the big two supermarket chains, Coles and Woolworths?
In fact, fresh milk is about 20 per cent of the dairy story. You want to keep $1-a-litre milk AND enrich farmers; then focus on growing the other 80 per cent.
And to do that, you have to grow the co-op sector – Murray Goulburn, the elephant in the room and still a co-op, Bega and WCB. Even though the last two have corporatised.
There are three global giants operating in our market – Lion, Parmalat and Fonterra; and now also Canada’s Saputo, which wants to buy WCB.
Lion and Parmalat have shown minimal interest in growing into export products; Fonterra’s focus is qualified by what’s good for its main game, NZ dairy; Saputo’s an unknown quantity, as it has no business in Australia.
A merger between Bega and WCB would achieve nothing. There are zero synergies – one’s in western Victoria, the other’s in southern NSW. It would leave the industry still fragmented and unfocused.
Letting Saputo take over WCB would be an even worse dead-end. That would do even less to rationalise the local industry; while leaving the future of a significant slice of our industry hostage to Canadian and NZ corporate strategy.
It would also leave Bega stranded. It would almost certainly be taken over by someone, but without any strategic dynamic.
It we want to mimic NZ’s growth success, the only vehicle is Murray Goulburn. But the big problem is the blinkered competition mindset – that a WCB takeover by MG would reduce the competition for buying milk in the Warrnambool area.
Thus, MG’s move to bypass the ACCC and go straight to the Competition Tribunal for approval on the grounds of national interest.
It would be better if the ACCC had a much more holistic understanding of the real competition dynamics. Not just of the dairy industry itself, but of the interplay with the big two supermarkets, and in the global space.
In brief, The best thing that the ACCC – and/or political government – could do for farmers is to let MG grow into Australia’s Fonterra. They will get to sell more milk at higher prices. AND consumers could keep their $1-a-litre milk.
The very worst thing the ACCC could do farmers AND for consumers – is to try to preserve fundamentally unsustainable ‘competing’ buyers for their milk.
That would condemn them to a dying future and ultimately also higher prices for consumers.
There is no growth in fresh milk. There is no growth in the domestic market. The future is export. NZ and Fonterra have shown us how to get that. Do we sincerely want to seize the opportunity?
Source: Herald Sun