The Dairy Industry: Inventing Our Own Future

I intend to speak passionately today and I make no apology for it. I also intend to speak relatively briefly. Most of us have been to shareholders’ meetings. We’ve all had months of detail. We’re now just one weekend and one All Black test away from knowing the result of the most important commercial decision in New Zealand’s history. It’s time to focus on the big picture.

In the last six months, we’ve come a very long way in a relatively short time. It was December that we signed the historic Merger Agreement between the Dairy Group and Kiwi. We’ve worked with the Government on a Regulatory Package to address domestic market issues, and gained Government and Opposition support for the necessary legislation. We’ve worked as directors to resolve a vast range of issues. We’ve met with thousands of dairy farmers at meetings all around New Zealand. And here we stand today, as farmers, poised to make the final decision. We are about to invent our own future.

It’s not the first time New Zealand dairy farmers have done that. The whole history of our industry has been about New Zealand dairy farmers taking control of our own destiny. We’ve been united. It’s given us scale. We’ve had a common focus.

For at least three generations, the efforts of New Zealand dairy farmers have built this country’s most successful business. It’s worth repeating what we have achieved.

We’ve been able to build some of the world’s most popular dairy brands. Our marketing networks now span every continent and almost every country. Internationally, we’ve developed a reputation for quality, reliability and food safety that is second to none. And the co-operative principle means that we, the dairy farmers of New Zealand, own and control it.

Through all of the years, we’ve always been prepared to evolve our structure to meet new challenges and adapt to new market conditions. The boards of the two controlling co-ops are asking dairy farmers to do so again.

The decision we are seeking on Monday is not a radical departure from the past. In fact, it is the next logical step in the evolution of our industry. We have always faced a tough international market. All around the world, the dairy industry is regulated, protected and distorted in favour of our competitors. That’s not likely to change anytime soon. Now we face the new challenge of globalisation.

In almost every industry, companies are merging as fast as they can to stay afloat and thrive in the global market. Our customers are among them. It’s predicted that eventually there will be just ten major food retailers in the world. One of them – Wal-Mart – is forecast to achieve revenues of a trillion US dollars a year by the end of this decade.

Of course there is a place in the industry – in all industries – for small, niche players. But don’t let’s kid ourselves. A giant, global supermarket chain is always going to prefer the leading global brands when it comes to shelf- or refrigerator-space. We have to be one of the big players. Our competitors think so too.

There is a major merger, acquisition or joint venture in the global dairy industry every two and a half days. We’re seeing in the global dairy industry the same trend we’ve seen in other industries – the industry is consolidating into a small group of large players. As a result, the market share of the biggest dairy companies is constantly creeping up. We have to be one of those big companies. The efforts of three generations mean we start out with an incredibly solid platform to achieve it. We, the dairy farmers of today, are privileged and have a huge responsibility.

On Tuesday, we will have established ourselves at number nine on the global dairy company list. We will be there with a strategy to move up that list. The global industry is changing every week, but a rough guide is that increasing our turnover by around 20 percent would take us into the top five.

If any of you have been toying with the idea of splitting the industry in two, just compare that opportunity with the almost impossible challenge of two smaller companies starting much further down the list. You may have seen the Herald today. You’ll have seen the comments from the editor-in-chief of Europe’s Grocer Magazine. He says some of the big international dairy players want the merger to fall over, putting us at risk of being “cherry picked” by the big groups in Europe, the UK and the USA.

In contrast, one big New Zealand co-op is going to be an attractive partner for strategic alliances – and we’ve begun that work with Dairy Farmers of America, the world’s biggest co-op. We will be able to co-ordinate our industry’s strategic acquisitions, such as those in Australia.

The Business Case for Global Dairy Company anticipates gains from the merger of around 30 cents per kilogram of milk solids by the third year. That is a number in a business case that has been worked on diligently. I’m confident it’s a good, solid number. But what farmers know is that other factors will inevitably impact on the payout in any year – the international market, the dollar, and so forth. It’s always difficult to know whether we actually get the extra 30 cents. So let me put the benefits of the merger this way.

A ‘yes’ vote on Monday will preserve New Zealand’s premier export corporation, the New Zealand Dairy Board, in one piece. No other path forward guarantees that. We will eliminate the risk of us being forced to compete with one another overseas. That’s just a fundamental issue, as every farmer knows.

A ‘yes’ vote will confirm the value of our worldwide network of businesses that carry such strong international recognition and respect. It will convert our Dairy Board from a production-pushed corporation, owned by our dairy co-ops, into a new farmer-owned co-op, fully integrated with our merged processing dairy companies. It will put the two pieces of our business together for the first time, removing costly duplication and offering our customers an improved and faster service. That creates a platform for further growth – to really take the game to our competitors.

The merger will ensure our research programme remains fully co-ordinated. Already we are the world’s leader in whey, casein and protein research, but we are only just beginning to understand the full economic potential of the milk we produce on our farms.

At one end of the spectrum, milk is nature’s perfect human nutrition. Our research into the unique and special properties of milk will lead to the next generation of consumer dairy products, carrying our guarantee of food safety, quality and value. A united research programme will allow us to maintain our leadership in supplying high-tech ingredients to others in the food business. At the furthest end of the spectrum, we are already putting New Zealand milk into an extraordinary range of products for different industries.

Computer and TV screens can be covered by a protective film produced from elements of New Zealand milk. It wasn’t the sort of thing I went farming to produce, but new products like that can put more money into farmers’ pockets. At the farm end, a united research programme can ensure we sustainably maintain our status as the world’s most efficient and lowest-cost producer of milk.

This is the future we want to invent for ourselves. This is almost certainly the last chance we have to ensure it is dairy farmers who control that process.

For several years, we’ve been working towards a new structure for the industry that builds on the benefits of all the co-op mergers that have gone before. The status quo is no longer sustainable. It just doesn’t make sense when there are only two major co-ops rather than hundreds of small ones.

All the leading experts who have looked at the issue over the years have settled on the GlobalCo proposal. We all know it is time to take the next step.

The head of McKinsey’s said this week that “there is an urgent need to settle structural issues to maintain the industry’s reputation in the international marketplace”. The head of McKinsey’s went on: “Having come this far, we believe the marketplace would view a ‘no’ vote very negatively and the industry would lose considerable momentum.” McKinsey’s said it was strongly in farmers’ interests to vote yes.

That was from the outside experts. I prefer how Warren Larsen put it. He says “we must have the merger and we haven’t got all day”. Sir Dryden Spring has urged farmers to vote ‘yes’ saying the merger is a “unique opportunity the industry has worked towards for so long”.

The feedback I’ve had from farmers here at Fieldays these last three days has been very positive. We had positive feedback from the 60 shareholder meetings over the last two weeks. But the threshold we have to reach is high. We need 75 percent of the votes cast by shareholders – three out of every four. With a threshold that high you can never rule out a close vote.

We thought this issue was important enough to New Zealand to try to track opinion a little more formally than we’ve done with other mergers. You’ll have seen in the Waikato Times that the work says an overwhelming majority of farmers support the merger. It says we’re above the threshold but possibly only just. It means every vote counts. Each shareholder could potentially be the one to tip the result one way or the other. It is very important everyone votes. We need a strong mandate for the new company.

And, finally, again, let’s not kid ourselves. We have been debating this issue, and working with two governments, for several years. The Government and the Opposition have both worked constructively with us over the last six months. They both say they will back the necessary legislation to make the merger happen. But if we don’t get over the line this time, we’re unlikely to ever have another chance in quite the same way.

It’s vitally important that no shareholder rejects the proposal on some point of detail expecting a more comfortable cab to come up to the rank anytime soon. It’s not going to happen. The Government’s view is that it has invested a huge amount of time and energy into this merger. It won’t do it again.

If we fall just short of the 75 percent threshold, then I’m not keen to pick what would come out of it. We would be in an extremely difficult position: the vast majority of farmers supporting the merger, but a couple of points short of making it happen. We could forget about inventing our own future. We would risk having the future invented for us, by others.

I have confidence in New Zealand dairy farmers. At all the key points in our history we have made the right choice. On Monday I believe we will do so again. I believe passionately in the co-operative principle. I believe passionately in the need for unity. On Monday I hope to announce that we are the shareholders of the world’s ninth largest dairy company, ready to grow.

We can then start building the world’s best-known dairy organisation, as a platform to deliver an increasing standard of living for our shareholders and the wider benefits that we bring to New Zealand.

As Chairman, I know that with a bigger company we will have to put even greater effort into keeping in close touch with all our shareholders. That is the strength of our industry, and I make that commitment to you today.

All the very best.

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