Fonterra Scores Coup with Dexcel

25 May 2005

Fonterra Scores Coup with Dexcel

By Keith Woodford Professor of Farm Management and Agribusiness Lincoln University

Fonterra appears to have achieved a big coup in bringing Dexcel within the Fonterra fold. Dexcel is the nation-wide industry organisation that undertakes on-farm research and extension for the benefit of the whole industry. It has about 180 employees.

It is difficult to criticise Fonterra. It is simply using its power to benefit its shareholders. It appears to be the first step towards a new era where farm-based research is privatised. But there are some difficult questions for Dexcel’s Board of Trust to answer in terms of whether this is in the interests of all of Dexcel’s stakeholders.

Under the agreement announced this week by Dexcel and Fonterra, Dexcel will retain its brands and identity. But Dexcel managers will report directly into Fonterra, and Fonterra has made it clear that it plans to influence the research that is undertaken. Presumably Fonterra will also use its direct links with farmers to get the message out to these particular stakeholders.

There appears to be nothing in the Dairy Industry Restructuring Act (DIRA) of 2001 to stop the take over from occurring. The prospect of Fonterra taking over this whole of industry organisation was probably never considered at that time. But it was to stop Fonterra from gaining an entrenched monopolistic position that the DIRA was put in place. And this move, putting Fonterra in control of all the on-farm research and extension, clearly reinforces Fonterra’s monopolistic position. There has been no purchase cost.

Dexcel is structured as a tax exempt not-for-profit trust. It seems that this structure will be retained, at least for the next three years. But this will just be the shell. In reality, Dexcel will be part of Fonterra.

Dexcel obtains much of its funds from Dairy Insight, which collects a levy from all farmers under the Commodity Levies Act of 1990. Dairy Insight then allocates these funds for specific projects. Dairy Insight Chairman, Ian Robb, has expressed surprise at this week’s events. Mr Robb, as the immediate past Chairman of Westland Co-operative Dairy Company, would be well aware that this may not be in the best interests of his fellow Westland dairy farmers, who do not belong to Fonterra.

Dairy Insight has 17,000 stakeholders who separately vote in the Directors of both Dairy Insight and Dexcel. These stakeholders include about 4500 sharemilkers who pay part of the levy but do not have shares in Fonterra. Also, the non-Fonterra farmers include the suppliers of Tatua and Open Country, as well as Westland.

Dexcel appears to have conflicts of interest. Its Chairman, Jim van der Poel is also one of Fonterra’s nine farmer appointed directors. It is in situations such as this that having industry leaders wearing multiple hats gets more than a little messy. It is notable that Dexcel’s CEO, John Caradus, has apparently already made the move to Fonterra.

The history of the dairy industry shows that change occurs in incremental steps. So the current three-year management agreement will probably be just the first step to somewhere different. After three years Fonterra will be in a position, if it so wishes, to employ the Dexcel staff directly. At that time it could advise its members to vote against continuing the levy under the Commodity Levies Act and for Fonterra to run the research as a totally internal operation.

At that point Dexcel will have been destroyed and the rest of the industry will have no organisation to conduct whole of industry research. It will be a master coup, and it is not clear how anyone can stop it from happening.

ENDS

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