Fran O'Sullivan: Fear-mongering doesn't compute

New Zealand Herald | Apr 14, 2010

Fran O'Sullivan

Fonterra's top brass are quickly finding out there is some truth to the cliche that a week in politics is like a lifetime.

Last Wednesday, Fonterra chairman Sir Henry van der Heyden issued a battle cry to rally his 10,500 farmers behind the co-operative's proposed share-trading plan by implying it could be a bulwark against the Chinese invaders by enabling the dairy giant to shore up its domestic defences.

Now, Federated Farmers is using the May Wang-fronted Natural Dairy incursion to prove to protectionist minded American dairy farmers that they have nothing to fear from a Kiwi invasion into their market.

Something doesn't quite compute here.

To be honest - Sir Henry didn't actually use the term "Chinese invaders" at his press conference to roll out the next phase of Fonterra's capital structure plan.

Fonterra has been very careful not to single out China in any of its public statements that cast doubts over proposals by Chinese-backed entities to invest in this country's dairy industry.

This is hardly surprising given its own plans to expand its production footprint in China.

But who, seriously, is in any doubt over which parties Sir Henry was referring to when he warned of a heightened risk to the New Zealand dairy industry from other nations buying up large tracts of land elsewhere to secure their future food supplies?

"Some of these entities are well-resourced, well capitalised, and will take a long-term strategic view, even if it is unsustainable in the short-term. They will have the ability to pay the farmer a bloody good milk price."

The recent splurge of publicity over the Natural Dairy bid for 29 Crafar farms that are in receivership is obviously what has got up Fonterra's nose.

Clearly, the dairy co-operative wouldn't mind if the Chinese-backed company just wanted to keep on selling the former Crafar-produced milk to the country's dominant dairy company.

But the Wang-led proposal, to ultimately invest $1.5 billion in New Zealand and create a vertically integrated UHT milk and baby-formula company which will service the Chinese market, does present a competitive risk to Fonterra.

At this stage of the game it is not a large risk. Wang doesn't have any skin in this particular industry.

The real issue is whether she is just a "front-person of convenience" who will simply step aside when the deals are done in favour of more experienced Chinese or Maori industry personnel - or whether she intends to play as a talented amateur for the long term.

So far, she has been unduly secretive. Her backers are yet to properly disclose themselves, which should lead the Overseas Investment Office to demand a lot more information before it gives approval.

Wang's spinmeister, Bill Ralston, has had some fine sport pointing out Natural Dairy plans to adopt Fonterra benchmarks for price, forex and production.

In essence, the company doesn't plan to undercut other competitors, and by producing added-value products it should command higher prices in China and therefore be able to pay more for its milk supply here.

This tends to suggest that Natural Dairy will in time emerge as a more fully-fledged competitor for New Zealand's milk supply - not just a vertically integrated company which uses milk from the farms it owns.

Fonterra needs some strong competitors to keep it on its toes. But some national interest issues should be considered.

By selling to Wang, the Crafar receivers and the banks they represent will get a full price for over-leveraged farms when arguably the best result for the dairy industry would be for the bankers to take a haircut to clear the way for more Kiwis to buy farms.

The real importance of the Wang-led initiative is that it is a foretaste of what lies ahead for the Kiwi dairy industry if it does not get its act together.

If the Government wants Fonterra to come into its own as a "national champion", Cabinet ministers need to think through the implications of overseas companies, backed by cheap money, grabbing a big slice of a market which stands to markedly increase in value as the world population grows.

Van der Heyden is a sufficiently seasoned enough dairy politician to leverage the Natural Dairy bid to whip his farmers into line to support Fonterra's plan to strengthen its balance sheet by finally removing the share-redemption risk to the company.

That has resulted in hundreds of millions of dollars washing in and out of its books each year and prevented it from properly funding its own expansion.

The latest proposal is logical and on balance ought to succeed.

But there is another side to all this.

Federated Farmers is now using the Wang initiative to prove a point to protectionist minded US Senators that Fonterra is not the "dominant quasi-government organisation the US dairy lobby makes it out to be".

Thirty US senators - at the behest of the American dairy lobby - have mounted the line that the proposed Trans Pacific Partnership trade agreement involving the US, New Zealand and six other nations will hurt the American dairy industry.

Instancing the Wang deal, Federated Farmers president Don Nicolson pointed out in a letter to senators that a listed Hong Kong company has moved to invest US$1.1 billion under the New Zealand-China free trade agreement.

"This will establish a dairy company, involving the purchase of farms and the building of plants, so Fonterra is not the dominant quasi-government organisation the US dairy lobby makes it out to be.

"Given there are no government subsidies for New Zealand's farmers and no impediment to outside competition in the form of import tariffs, quota restrictions or investment constraints, the TPP means the gate will swing both ways."

Someone needs to put Fonterra and the Feds into the same room.

The only player that now looks as if it swings both ways is the New Zealand dairy industry: protectionist at home and free market overseas.

Who's involved?

Who's involved?


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