By Keith Woodford*
Since the formation of Fonterra in 2001, Goodman Fielder has always had a guaranteed supply of 250 million litres of Fonterra milk. MPI Minister Nathan Guy is now proposing that the time has come for Goodman Fielder to fend for itself.
For the last fifteen years, the major milk supply chain in New Zealand has comprised one supplier (Fonterra), two processors (Fonterra and Goodman Fielder) and two supermarket chains (Foodstuffs and Progressive). It has indeed been a cosy arrangement.
It is this cosy arrangement, combined with a goods and services tax on food of 15% which is either absent or imposed at a lower rate in most countries, that has led to milk in New Zealand supermarkets being more expensive than elsewhere. The processing and marketing margins are not disclosed, so the relative returns to the processors and supermarkets can only be estimated. But it is a fair bet that both processors and supermarkets do rather nicely.
Some two years ago, I wrote a post called ‘Why is New Zealand’s retail milk so expensive where I made some international comparisons. Back then, I found that the farmgate-to-consumer margin per litre was $1.26 in New Zealand, but only 55c in Australia, 60c in the USA, and 65c in Canada. At this same time, the margins in the UK were even lower at 20c, but that was caused by non-sustainable competition, whereas the margins in other countries were long term and normal.
The question now is whether removing Goodman Fielder’s current dairy supply system – a proposal which has not impressed Goodman Fielder at all – will lead eventually to a more competitive sector.
First of all, it is important to understand something more about Goodman Fielder. In a corporate sense they tend to operate below the radar in New Zealand. But that is only in a corporate sense. Their brands are everywhere in the supermarkets.
Goodman Fielder’s New Zealand brands include Meadow Fresh, Meadow Lea, Naturalea, Edmonds, Irvines, Ernest Adams, Chesdale, Tararua Dairy, Olivani, Vogel’s, Molenberg, Freyas, Mackenzie High Country Bread, Quality Bakers and Puhoi. That is not all of them.
So who actually is Goodman Fielder?
Goodman Fielder has diverse roots in both Australia and New Zealand, and most people think of it as Australian, but from 2015 the two joint owners are Wilmar International headquartered in Singapore and First Pacific from Hong Kong.
Wilmar International describes itself as ‘Asia’s biggest agribusiness group’ but its spread is worldwide. Amongst many other things, Wilmar is the largest global refiner of palm oil, and it is also a source of PKE used on New Zealand farms.
First Pacific is a Hong Kong Investment company with assets in food and telecommunications. The Goodman Fielder investment comprises between 3% and 6% of its total portfolio, depending on how the calculations are done.
The bottom line is that Goodman Fielder is a dominant force in New Zealand food, with huge financial muscle sitting in the background to be called upon when needed.
So how will Goodman Fielder respond when scratched in this way by Minister Guy? The one thing for sure is that it will have to do something.
In theory, Goodman Fielder could still get its milk from Fonterra under contract, but that would be at prices determined by Fonterra rather than current regulated prices. So Goodman Fielder would be cautious of that, given the associated power relationship with Fonterra being both competitor and supplier, with power to screw the scrum.
The second option would be for Goodman Fielder to contract milk from other milk processors, with Open Country an obvious option for the North Island. Open Country would be amenable to that. However, Open Country does not have suppliers in Canterbury and these would be needed for the major Christchurch factory. Westland Dairy co-operative would be an alternative option for the South Island. Regardless of the specifics, Goodman Fielder would want to be in a position that leaves it in control at the bargaining table.
A third option is that Goodman Fielder could contract its own suppliers. But as long as Goodman Fielder’s New Zealand focus is primarily on the internal market, then this is unlikely to be attractive. This is because managing the vagaries of farm milk supply is not part of Goodman Fielder’s core business, and managing supply would be a distraction. To meet present demand, they would need about 150 average-sized farms across the country. Having its own supply of farmers would work best in conjunction with manufacture of both short and long-life dairy products, and with greater scale than present.
That opens the possibility that Goodman Fielder might broaden its dairy vision and become a major dairy exporter to Asia. They already do some exporting of Meadow Fresh UHT products. So this, plus their own farmer supply, could become the stringboard for a much wider suite of products. There is little doubt that if they wanted to, Wilmar International together with First Pacific have the financial muscle to make it happen.
If Goodman Fielder were to climb onto the springboard, then in the process New Zealand’s consumer dairy products could be catapulted into the 21st century. Quite simply, both Goodman Fielder and Fonterra currently treat the New Zealand market as an international backwater. If anyone doubts that statement, when next on holiday in Australia just look at the chiller cabinets over there in comparison to ours.
In theory, there is nothing to stop start-up companies here in New Zealand taking on the giants internally within this country, and there are already examples of companies which try to fill specific niches. But with two big giants in the background, any potential new entrant has to think carefully.
The rules of the game allow financial muscle to be exerted within New Zealand’s business environment in ways that could not occur in many overseas jurisdictions. And wherever duopolies exist, there is huge market power to be protected. So rocking the boat by new entrants needs to be done with caution.
So will deregulation of farmgate milk supply really change anything much either in the supermarket chiller cabinets or back at the farmgate? Could it even result in a curved ball being thrown back to Fonterra, with Goodman Fielder stirring from its dairy slumber and creating a major integrated dairy chain into Asia? Or will Goodman Fielder simply say that dairy in New Zealand has been a nice little money earner, but in the new environment its assets are better employed elsewhere? It’s somewhat like a game of chess, but in this case a lot more depends on it.
Keith Woodford is Professor of Agri-Food Systems (Honorary) at Lincoln University and a Senior Fellow (Honorary) of the NZ Contemporary China Research Centre. His archived writings are at http://keithwoodford.wordpress.com