The Shoeshine Column: No reason to let dairy merger off the competition hook

Friday 26th January 2001

As GlobalCo itself argues, if the government doesn't like the outcome, it can always change the rules.

The government that stuffs up the New Zealand dairy industry will truly have earned its place in the history books.

The industry provides an income to around 14,000 farmers and, indirectly, to tens of thousands of others. It accounts for 20% of exports, going into 120 countries. It makes up 7% of gross domestic product.

So it's hardly exaggerating to say the success or failure of the proposed Global Dairy Company merger will affect the country's economic wellbeing profoundly. And the whole thing now sits squarely in the lap of Agriculture Minister Jim Sutton.

Sutton has already shown his government is sympathetic to the industry's restructuring plans but there's more to it than simply demolishing a few legislative roadblocks, shepherding the merger through and then abolishing the Dairy Board's export monopoly.

As the industry's submission to the government shows, the merger has serious implications for competition policy and law and could even trigger a complete rethink of the Commerce Act.

Simply put, the problem is that, should the merger go ahead, GlobalCo's farmers will supply almost all domestic milk. Under the Commerce Act that would never do - the Commerce Commission's "safe harbour" guidelines for approving mergers is that a new entity should not have a market share of more than 40%, or 60% where another player has at least 15%.

During the previous merger talks that sputtered out in 1999 the commission made this clear to Kiwi Co-operative Dairies and New Zealand Dairy Group, the two processing giants that, along with the Dairy Board, are to make up GlobalCo.

The would-be partners appealed to the commission's better nature, asking for "authorisation" on the grounds of public benefit. The commission wasn't impressed, mainly because its charter doesn't allow it to be impressed.

It cannot, for example, take into account jobs created or retained, gains in an industry's international competitiveness, or the benefits of developing and keeping world-class management skills.

Now the industry is asking the government to take the decision out of the commission's hands.

"In essence," says the letter to Sutton, "we are saying a balance must be struck by the government between competition for its own sake, the undesirable and unintended consequences of competition, and other national goals which competition alone cannot deliver."

Fair enough. But Shoeshine reckons a battalion of lawyers must have worked on the supporting submissions, all falling over themselves trying to cover every conceivable base. The result is a hotch-potch of arguments that are not infrequently at odds with one another.

The industry argues, convincingly enough, that it simply isn't like any other industry and shouldn't be analysed in the same way for competition purposes.

The dairy farmer, the argument goes, is unique as the only producer who must produce every day, and who must have his production collected and processed immediately.

So farmers can't switch between processors, who wouldn't in any case have enough transport or processing capacity mid-season.

Because of this the industry merits special treatment. But that wouldn't create a precedent the forestry or wine industries, say, could try to exploit to avoid the competition net - it's simply consistent with the government's "tailoring (in the case of telecommunications and electricity) of economic principles to the circumstances of each industry."

This "we're different but we're not" approach is compounded by drawing attention to an article, "Unique New Zealand needs unique competition laws," by the Institute for the Study of Competition and Regulation's Lewis Evans. Evans argues our size and other characteristics suggest we need tailored, not off-the-peg, competition law. By forcing firms to be small by New Zealand standards we risk raising costs for consumers and making it hard for firms to compete with imports.

If that's so, the Commerce Act itself is at fault and that's a problem for all industries, not just dairying. So the government, far from merely making exceptions for specific industries, needs to address the entire competition policy framework, a complex and time-consuming process the merger proposal's authors can't possibly have intended.

Last but not least is the obvious disconnect between the measures the industry is volunteering to keep the domestic market competitive and the call for the government to short-circuit the approval process.

GlobalCo is offering to divest, within one year of the merger, its remaining half-stake in New Zealand Dairy Foods, which holds 40% of the consumer dairy products market with brands such as Anchor and Fernleaf.

The other half-stake is held by Dairy Group's existing individual shareholders. Possible buyers are the only non-GlobalCo co-op of any size, Tatua, or one of the big international players such as Kraft or Parmalat. GlobalCo's Mainland would also have around 40%.

Fair enough. A 40% share is sufficient to meet the commission's "safe harbours" test. So why not just let the commission apply its usual analysis?

The answer, Shoeshine suspects, is that the commission wasn't born yesterday and would look askance at the likely shape of the post-merger landscape.

NZDF, and any new entrant, would be almost entirely reliant on GlobalCo for milk supply. Sure, GlobalCo proposes the commission be given the power to control milk prices if it feels, after three years, GlobalCo's prices aren't fair.

But by that time GlobalCo could have inflicted so much damage on NZDF that price controls would be an ambulance at the bottom of the cliff.

Convincing though GlobalCo's arguments for a megamerger might be, it's by no means clear why its effect on the home market shouldn't go through the usual competition analysis.

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