Post on 12-Jan-2016
History of NZ Dairy IndustryTony BaldwinLaw + policy specialist WellingtonIntelact Nutrition9 June 20032003 Conference
Reason for my interest No strong ideological bent Lack of intellectual honesty Poor process Weak leadership Very poor monitoring (out of view) Impact on allocation of resources in
Some experience and expertise Old fashioned sense of public dutyNote I am only presenting publicly available informationContd Would like to see it do well
OutlinePart 1: OriginsPart 2: Mega MergerPart 3: Change
Part 1: Origins
Cultural roots
Approach to marketing
Strategy
Outcomes from first 125 years
Cultural roots
Know the past if you would divine the future
Confucius
Primitive....unhygienic.....tiring....boring. Milking cows was hard...
David Yerex, Empire of the Dairy Farmer. For many years, Mr Yerex was the editor of the industrys publication The Dairy Exporter
Cheek by jowl, almost all poor....
Enduring serious hardships, including anthrax (which is, of course, topical given recent international terrorist threats)
....Early dairy farmers all had the same ambition to achieve a decent life for their families. They all came from much the same class in Britain. All shared the same hatred of the worst features of English class society. David Yerex, Empire of the Dairy Farmers
Like gold prospectors of the era, dairy farmers shared a dream that milk production would deliver independence and prosperityArthur Ward: No industry involved in the production of food would ever fail in a hungry world
Dairy farmers dreams were best summed up by William Bowron, the Governments Chief Dairy Expert, in his report to Parliament in 1894:
The untold enduring wealth of NZ lies upon the surface............
....and the cow is the first factor in the way of securing it.....
......We have only to make the prime article in butter and cheese, then no power on earth can stay the flow of white gold in this direction."
Government Dairy InspectorsWilliam Bowron Chief Dairy Expert for the Government, 1894
NZ DAIRY BOARD, 6 APRIL 2001Milksolids are the white gold left for export processing.......and the Dairy Board sells it all..... Neville MartinWAIKATO TIMES, 11 OCT 1997As Waikato's white gold builds to a record flush, milk tankers work around the clock to collect it from over 6000 farmers..THE PRESS, 14 OCT 2000The great silver trucks glide up and down Ashburton's West Street, and then spread out to the plains of Mid Canterbury to fill their bellies with white gold. THE SOUTHLAND TIMES, 21 JUN 2001White gold flows on down in Southland dairy sheds
Dairy farmers developed a suspicion of city and urban interests...were seeking more than a fair share of his hard-won livelihood. Arthur Ward, A Command of Co-operativesFarmers were particularly suspicious, without good reason, that Tooley St merchants (UK importers) were screwing them.
These outside interests included virtually everyone beyond the farm gate: processors, quality controllers, wholesalers, distributors, merchants, advertising agents, bureaucrats, retailers, financiers and tax gatherers. David Yerex
Dairy farmers would congregate for hours and reinforce each others prejudices Gordon McLaughlan, Illustrated History of NZ Agriculture
Unity among farmers emerged from their shared distrust of outsiders David YerexChew Chong, Taranaki
Dairy farmers came to believe - and it was an article of faith - that they secured more of the selling price of their produce by the cooperative method Arthur Ward, A Command of Co-operatives After a slow start, the concept of the cooperative dairy company spread like a faith an extension of the small-holders desire for as tight a mastery as possible over his destiny Gordon McLaughlan, An Illustrated History of NZ Agriculture
It is a strange paradox, then, to find the industry was largely created by the Government. And for 100 years, whenever problems arose, the industry always turned to the Government. The industrys culture is driven by a fierce determination among farmers to be free men
Industry historians like Arthur Ward, Gordon McLaughlan, David Yerex highlight that the culture and values of those pioneering days have been powerful influences in the modern era
Marketing
The essence of any business is to capture value from customers, managing risks efficiently
ConsumersProducersWhat are customers willing to pay ?Can I get a margin to cover my full costs?What if demand drops?Risk of over-supply ? How to hedge risks? Exchange rate?Best presentation? Post-sales service? Best logistics ? What are my competitors doing? Customers demands provide value signals for producers Trade access?QA?
Dairy consumersDairy producersThe responsibility of selecting a suitable marketing medium...was laid upon the bodies of farmers, who while mostly good farmers, were in no position to judge the markets or marketing organisation.Mr PottingerDirector of State Marketing Dept, thenNZ Dairy Products Marketing Commission
Dairy consumersDairy producers1914-21Imperial Commandeer1914 1930sGovt Board of Agriculture1895 1921Govt Dairy Commissioner1900 1921London Office for National Dairy AssociationValue signals blunted
Dairy consumersDairy producers1923 62 Dairy-produce Board of Control [Renamed NZ Dairy Board in 1935]1936 47State Marketing Department1934 Royal Commission into the Dairy Industry1935 - 47Executive Commission of Agriculture1922 (date)Dairy Council Value signals blunted
Dairy consumersDairy producers1947 62Dairy Products Marketing Commission1942 (date)Reserve Bank Dairy Stabilisation Account 1942 (date)Dairy Industry Cost Adjustment Committee1950s (date)Dairy Industry Price Fixing Authority1953 (date)Milk Powder CouncilValue signals blunted
Dairy consumersDairy producers1962 2002Dairy Products Control + Marketing Board[Renamed NZ Dairy Board]1956 (date)Dairy Industry Loans Council1955 Govt Committee of Inquiry into the Dairy IndustryValue signals blunted
FarmersDairy companiesNational Dairy Association (shipping)Tooley St ImportersConsumersWholesale + retail1890 1914Open ExportsSignals of customer valueExport contractswith individualco-ops
FarmersDairy companiesNational Dairy Association (shipping)Tooley St ImportersConsumersWholesale + retail1914 1922Single DeskImperial Commandeer NZ Govt Purchased for UK GovtPrice LobbyingSignals blunted
FarmersDairy companiesNational Dairy Association Limited
Tooley St ImportersConsumersWholesale + retail1922 25Open ExportsSignals of customer valueExport contractswith individualCo-opsDairy-produce Board of Control Shipping, administration + politics
FarmersDairy companiesNational Dairy Association
Tooley St ImportersConsumersWholesale + retail1926Single DeskSignals blunted(politics)Dairy-produce Board of Control
Dairy-produceBoard of Control
FarmersDairy companiesConsumersWholesale + retail1927 GoodfellowsProposal (not accepted)
Amalgamated DairiesEmpire DairiesSelected TradersVoluntary shareholdingSignals of customer value
FarmersDairy companiesNational Dairy Association
ConsumersWholesale + retail1927 34Open ExportsSignals of customer valueTooley St ImportersDairy Board of Control Shipping, administration + politics
Dairy-produce Board of ControlExport contractswith individualco-ops
FarmersDairy companiesNational Dairy Association Tooley St ImportersConsumersWholesale + retail1934 46Single Desk
Govt Marketing Department
Price CommitteesSignals bluntedExecutive Commission of AgricultureDairy-produce Board of Control
Government guaranteed price schemeSet prices that assure an efficient farmer of a sufficient net return to enable him to maintain himself and his family in a reasonable state of comfort." From the relevant legislation
FarmersDairy companiesNational Dairy Association ConsumersWholesale + retail1946 - 62Single Desk
Dairy Products Marketing Commission
Govt Stabilisation AccountDairy Loans CouncilMilk Powder Council1940 - 57UK Bulk PurchaseEmpire Dairies (1953)Signals blunted
FarmersDairy companiesNational Dairy Association Tooley St ImportersConsumersWholesale + retail1962 1980sSingle Desk
Dairy Products Marketing Commission
Dairy Price Fixing AuthoritySignals bluntedDairy-produce Control BoardGovt Stabilisation AccountDairy Loans CouncilMilk Powder CouncilDairy-produce Control Board
FarmersDairy companiesSelected Traders ConsumersWholesale + retail1980s 2002Single Desk
Dairy Board
Signals BluntedOverseas Operations
FarmersSelected Traders ConsumersWholesale + retail2002 Fonterra
Signals bluntedFonterra
FarmersDairy companiesConsumersWholesale + retail1927 GoodfellowsProposal (not accepted)
Amalgamated DairiesEmpire DairiesVoluntary shareholdingSignals of customer valueSelected Traders
For 82% of last 102 years, dairy exporting has been heavily Govt controlledGovt contols
Periods of Open Exporting
13831768
1914 - 22
1926
1927 - 34
1935 - 2002
1922 - 25
1900 - 14
Open v Restricted Exporting
Sheet1
00-1312345
14-222
22-251
262
27-341
34 - 2022
2377
13831768
123456
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Industrys strategy
StrategyBoost production
Lower costs
This was the principal focus for MAF (dairy division) until quite recently. Other measures included cheap govt loans, opening up Crown land for dairying, govt research funding and institutes, govt dairy advisers and govt prizes for achieving certain export targetsAs above, but key factors were govt funded research and development, plus govt instructors and field advisers.
Strategy (contd)Single exporterMinimise internal competition
Legislating co-ops, single desk selling, price fixing and smoothing, grading and quality controls and new product development.Many examples, including empowering the Board to zone milk collection areas to eliminate pernicious inter-factory competition.
Outcomes
Real return on milk production
Real Milk Payouts
829.2682926829
800
820
811.320754717
781.8181818182
736.8421052632
741.3793103448
655.737704918
629.0322580645
621.2121212121
590.9090909091
597.0149253731
565.2173913043
585.7142857143
638.8888888889
613.3333333333
597.4025974026
575
482.3529411765
460.6741573034
440.8602150538
480.3921568627
576.5765765766
542.3728813559
589.1472868217
513.698630137
488.2352941176
443.8775510204
437.5
415.3225806452
419.2439862543
452.380952381
500
478.4580498866
454.347826087
453.3073929961
392.1232876712
298.0910425844
311.5845539281
417.3027989822
425.8600237248
275.3128555176
375.2808988764
406.6666666667
364.0350877193
360.9341825902
412.6163391934
368.154158215
342.6853707415
357.2854291417
373.8872403561
481.5847067434
498.7471952403
Real Milk Payouts
Trend line
1950 - 2002
c/kg of milk solids
Sheet1
Industry Average Dairy Payouts
SeasonRealCPI = base June 1999Nominal
195082934
195180036
195282041
195381143
195478243
195573742
195674143
195765640
195862939
195962141
196059139
196159740
196256539
196358641
196463946
196561346
196659746
196757546
196848241
196946141
197044141
197148049
197257764
197354264
197458976
197551475
197648883
197744487
197843898
1979415103
1980419122
1981452152
1982500195
1983478211
1984454209
1985453233
1986392229
1987298203
1988312234
1989417328
1990426359
1991275242
1992375334
1993407366
1994364332
1995361340
1996413399
1997368363
1998343342
1999357358
2000374378
2001482501
2002499532
Sheet2
Sheet3
Sheet4
Sheet5
Number of cows (1895 - 1971)
257140
372416
633733
890220
1499532
1799603
1898197
1997819
2361599
Number of cows
Number of Cows (1895 - 1971)
Number of Cows (1974 - 2002)
2079886
2280273
2830977
3485883
Number of cows
Number of cows (1974 - 2002)
Production (1901 - 1971)
202000104000
302000439000
8980001369000
19890001636000
22630002366000
19490002132000
33010001752000
38280001824000
Butter
Cheese
Hundred weights
Production
Production (1976 - 2001)
479
524
788
1046
Kg Milk Solids
Production (1976 - 2001)
Cow Productivity
250.25
229.25
248.5
264.25
257.25
252
250.25
269.5
269.5
274.75
241.5
269.5
250.25
257.25
259
274.75
259
278
271
283
301
292
256
288
310
&A
Page &P
KgMS per cow
1976 - 2001
KG Milksolids
Cow Productivity
Sheet1
Notes for Tony Baldwin's Speech @ Dairy Conference 2003
YearNumber of cows
1895257,140
1901372,416
1911633,733
1921890,220
19311,499,532
19411,799,603
19511,898,197
19611,997,819
19712,361,599
YearButter produced (Cwts)Cheese Produced (Cwts)
1901202,000104,000
1911302,000439,000
1921898,0001,369,000
19311,989,0001,636,000
19412,263,0002,366,000
19511,949,0002,132,000
19613,301,0001,752,000
19713,828,0001,824,000
(Agriultural and Pastoral Statistics of New Zealand 1861-1954. Department of Statistics, New Zealand 1956)
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cowNational KgMS (000,000)
74/752,079,88618,540112not available224425
75/762,091,95018,442115not available240466
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cow*National KgMS (000,000)
76/772,074,44317,924117not available250479
77/782,052,62417,363120not available229437
78/792,039,90216,907123not available249477
79/802,045,80816,506126not available264506
80/812,027,09616,089129not available257491
81/822,060,89815,82113363252491
82/832,128,19915,81613764250505
83/842,209,72515,93214065270564
84/852,280,27315,88114664270578
85/862,321,01215,75315064275609
86/872,281,84915,31515165242524
87/882,236,29014,81815365270579
88/892,269,07314,74415766250541
89/902,313,82214,59515967257572
90/912,404,14514,68516470259599
91/922,438,64114,452169not available275637
92/932,603,04914,45818074259651
93/942,736,45214,59718877278736
94/952,830,97714,64919380271733
95/962,935,75914,73619982283788
96/973,064,52314,74120886301880
97/983,222,59114,67322087292891
98/993,289,31914,36222991256850
99/003,269,36213,86123693288970
00/013,485,88313,892251963101046
(Livestock Improvement Corporation Limited Dairy Statistics 2000-2001)
Additional Information Requested for speech notes
** Approximately 12-14KgDM are required to produce 1KgMS.This will vary depending on the cows production efficiency and the time
of the year (I.e. the nutritive value of the feed).
Sheet2
Sheet3
Number of cows (1895 - 1971)
257140
372416
633733
890220
1499532
1799603
1898197
1997819
2361599
Number of cows
Number of Cows (1895 - 1971)
Number of Cows (1974 - 2002)
2079886
2280273
2830977
3485883
Number of cows
Number of Cows (1974 - 2002)
Production (1901 - 1971)
202000104000
302000439000
8980001369000
19890001636000
22630002366000
19490002132000
33010001752000
38280001824000
Butter
Cheese
Hundred weights
Production
Production (1976 - 2001)
479
524
788
1046
Kg Milk Solids
Production (1976 - 2001)
Cow Productivity
250.25
229.25
248.5
264.25
257.25
252
250.25
269.5
269.5
274.75
241.5
269.5
250.25
257.25
259
274.75
259
278
271
283
301
292
256
288
310
&A
Page &P
KgMS per cow
1976 - 2001
KG Milksolids
Cow Productivity
Sheet1
Notes for Tony Baldwin's Speech @ Dairy Conference 2003
YearNumber of cows
1895257,140
1901372,416
1911633,733
1921890,220
19311,499,532
19411,799,603
19511,898,197
19611,997,819
19712,361,599
YearButter produced (Cwts)Cheese Produced (Cwts)
1901202,000104,000
1911302,000439,000
1921898,0001,369,000
19311,989,0001,636,000
19412,263,0002,366,000
19511,949,0002,132,000
19613,301,0001,752,000
19713,828,0001,824,000
(Agriultural and Pastoral Statistics of New Zealand 1861-1954. Department of Statistics, New Zealand 1956)
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cowNational KgMS (000,000)
74/752,079,88618,540112not available224425
75/762,091,95018,442115not available240466
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cow*National KgMS (000,000)
76/772,074,44317,924117not available250479
77/782,052,62417,363120not available229437
78/792,039,90216,907123not available249477
79/802,045,80816,506126not available264506
80/812,027,09616,089129not available257491
81/822,060,89815,82113363252491
82/832,128,19915,81613764250505
83/842,209,72515,93214065270564
84/852,280,27315,88114664270578
85/862,321,01215,75315064275609
86/872,281,84915,31515165242524
87/882,236,29014,81815365270579
88/892,269,07314,74415766250541
89/902,313,82214,59515967257572
90/912,404,14514,68516470259599
91/922,438,64114,452169not available275637
92/932,603,04914,45818074259651
93/942,736,45214,59718877278736
94/952,830,97714,64919380271733
95/962,935,75914,73619982283788
96/973,064,52314,74120886301880
97/983,222,59114,67322087292891
98/993,289,31914,36222991256850
99/003,269,36213,86123693288970
00/013,485,88313,892251963101046
(Livestock Improvement Corporation Limited Dairy Statistics 2000-2001)
Additional Information Requested for speech notes
** Approximately 12-14KgDM are required to produce 1KgMS.This will vary depending on the cows production efficiency and the time
of the year (I.e. the nutritive value of the feed).
Sheet2
Sheet3
Number of cows (1895 - 1971)
257140
372416
633733
890220
1499532
1799603
1898197
1997819
2361599
Number of cows
Number of Cows (1895 - 1971)
Number of Cows (1974 - 2002)
2079886
2280273
2830977
3485883
Number of cows
Number of cows (1974 - 2002)
Production (1901 - 1971)
202000104000
302000439000
8980001369000
19890001636000
22630002366000
19490002132000
33010001752000
38280001824000
Butter
Cheese
Hundred weights
Production (1901 - 1971)
Production (1976 - 2001)
479
524
788
1046
Kg Milk Solids
Production (1976 - 2001)
Cow Productivity
250.25
229.25
248.5
264.25
257.25
252
250.25
269.5
269.5
274.75
241.5
269.5
250.25
257.25
259
274.75
259
278
271
283
301
292
256
288
310
&A
Page &P
KgMS per cow
1976 - 2001
KG Milksolids
Cow Productivity
Sheet1
Notes for Tony Baldwin's Speech @ Dairy Conference 2003
YearNumber of cows
1895257,140
1901372,416
1911633,733
1921890,220
19311,499,532
19411,799,603
19511,898,197
19611,997,819
19712,361,599
YearButter produced (Cwts)Cheese Produced (Cwts)
1901202,000104,000
1911302,000439,000
1921898,0001,369,000
19311,989,0001,636,000
19412,263,0002,366,000
19511,949,0002,132,000
19613,301,0001,752,000
19713,828,0001,824,000
(Agriultural and Pastoral Statistics of New Zealand 1861-1954. Department of Statistics, New Zealand 1956)
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cowNational KgMS (000,000)
74/752,079,88618,540112not available224425
75/762,091,95018,442115not available240466
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cow*National KgMS (000,000)
76/772,074,44317,924117not available250479
77/782,052,62417,363120not available229437
78/792,039,90216,907123not available249477
79/802,045,80816,506126not available264506
80/812,027,09616,089129not available257491
81/822,060,89815,82113363252491
82/832,128,19915,81613764250505
83/842,209,72515,93214065270564
84/852,280,27315,88114664270578
85/862,321,01215,75315064275609
86/872,281,84915,31515165242524
87/882,236,29014,81815365270579
88/892,269,07314,74415766250541
89/902,313,82214,59515967257572
90/912,404,14514,68516470259599
91/922,438,64114,452169not available275637
92/932,603,04914,45818074259651
93/942,736,45214,59718877278736
94/952,830,97714,64919380271733
95/962,935,75914,73619982283788
96/973,064,52314,74120886301880
97/983,222,59114,67322087292891
98/993,289,31914,36222991256850
99/003,269,36213,86123693288970
00/013,485,88313,892251963101046
(Livestock Improvement Corporation Limited Dairy Statistics 2000-2001)
Additional Information Requested for speech notes
** Approximately 12-14KgDM are required to produce 1KgMS.This will vary depending on the cows production efficiency and the time
of the year (I.e. the nutritive value of the feed).
Sheet2
Sheet3
Number of cows (1895 - 1971)
257140
372416
633733
890220
1499532
1799603
1898197
1997819
2361599
Number of cows
Number of Cows (1895 - 1971)
Number of Cows (1974 - 2002)
2079886
2280273
2830977
3485883
Number of cows
Number of cows (1974 - 2002)
Production (1901 - 1971)
202000104000
302000439000
8980001369000
19890001636000
22630002366000
19490002132000
33010001752000
38280001824000
Butter
Cheese
Hundred weights
Production
Production (1976 - 2001)
479
524
788
1046
Kg Milk Solids
Production (1976 - 2001)
Cow Productivity
250.25
229.25
248.5
264.25
257.25
252
250.25
269.5
269.5
274.75
241.5
269.5
250.25
257.25
259
274.75
259
278
271
283
301
292
256
288
310
&A
Page &P
KgMS per cow
1976 - 2001
KG Milksolids
Cow Productivity
Sheet1
Notes for Tony Baldwin's Speech @ Dairy Conference 2003
YearNumber of cows
1895257,140
1901372,416
1911633,733
1921890,220
19311,499,532
19411,799,603
19511,898,197
19611,997,819
19712,361,599
YearButter produced (Cwts)Cheese Produced (Cwts)
1901202,000104,000
1911302,000439,000
1921898,0001,369,000
19311,989,0001,636,000
19412,263,0002,366,000
19511,949,0002,132,000
19613,301,0001,752,000
19713,828,0001,824,000
(Agriultural and Pastoral Statistics of New Zealand 1861-1954. Department of Statistics, New Zealand 1956)
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cowNational KgMS (000,000)
74/752,079,88618,540112not available224425
75/762,091,95018,442115not available240466
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cow*National KgMS (000,000)
76/772,074,44317,924117not available250479
77/782,052,62417,363120not available229437
78/792,039,90216,907123not available249477
79/802,045,80816,506126not available264506
80/812,027,09616,089129not available257491
81/822,060,89815,82113363252491
82/832,128,19915,81613764250505
83/842,209,72515,93214065270564
84/852,280,27315,88114664270578
85/862,321,01215,75315064275609
86/872,281,84915,31515165242524
87/882,236,29014,81815365270579
88/892,269,07314,74415766250541
89/902,313,82214,59515967257572
90/912,404,14514,68516470259599
91/922,438,64114,452169not available275637
92/932,603,04914,45818074259651
93/942,736,45214,59718877278736
94/952,830,97714,64919380271733
95/962,935,75914,73619982283788
96/973,064,52314,74120886301880
97/983,222,59114,67322087292891
98/993,289,31914,36222991256850
99/003,269,36213,86123693288970
00/013,485,88313,892251963101046
(Livestock Improvement Corporation Limited Dairy Statistics 2000-2001)
Additional Information Requested for speech notes
** Approximately 12-14KgDM are required to produce 1KgMS.This will vary depending on the cows production efficiency and the time
of the year (I.e. the nutritive value of the feed).
Sheet2
Sheet3
Number of cows (1895 - 1971)
257140
372416
633733
890220
1499532
1799603
1898197
1997819
2361599
Number of cows
Number of Cows (1895 - 1971)
Number of Cows (1974 - 2002)
2079886
2280273
2830977
3485883
Number of cows
Number of cows (1974 - 2002)
Production (1901 - 1971)
202000104000
302000439000
8980001369000
19890001636000
22630002366000
19490002132000
33010001752000
38280001824000
Butter
Cheese
Hundred weights
Production
Production (1976 - 2001)
479
524
788
1046
Kg Milk Solids
Production (1976 - 2001)
Cow Productivity
250.25
229.25
248.5
264.25
257.25
252
250.25
269.5
269.5
274.75
241.5
269.5
250.25
257.25
259
274.75
259
278
271
283
301
292
256
288
310
&A
Page &P
KgMS per cow
1976 - 2001
KG Milksolids
Cow Productivity
Sheet1
Notes for Tony Baldwin's Speech @ Dairy Conference 2003
YearNumber of cows
1895257,140
1901372,416
1911633,733
1921890,220
19311,499,532
19411,799,603
19511,898,197
19611,997,819
19712,361,599
YearButter produced (Cwts)Cheese Produced (Cwts)
1901202,000104,000
1911302,000439,000
1921898,0001,369,000
19311,989,0001,636,000
19412,263,0002,366,000
19511,949,0002,132,000
19613,301,0001,752,000
19713,828,0001,824,000
(Agriultural and Pastoral Statistics of New Zealand 1861-1954. Department of Statistics, New Zealand 1956)
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cowNational KgMS (000,000)
74/752,079,88618,540112not available224425
75/762,091,95018,442115not available240466
SeasonNumber of cowsNumber of herdsAv. Herd sizeAv. Effective HaKgMS/cow*National KgMS (000,000)
76/772,074,44317,924117not available250479
77/782,052,62417,363120not available229437
78/792,039,90216,907123not available249477
79/802,045,80816,506126not available264506
80/812,027,09616,089129not available257491
81/822,060,89815,82113363252491
82/832,128,19915,81613764250505
83/842,209,72515,93214065270564
84/852,280,27315,88114664270578
85/862,321,01215,75315064275609
86/872,281,84915,31515165242524
87/882,236,29014,81815365270579
88/892,269,07314,74415766250541
89/902,313,82214,59515967257572
90/912,404,14514,68516470259599
91/922,438,64114,452169not available275637
92/932,603,04914,45818074259651
93/942,736,45214,59718877278736
94/952,830,97714,64919380271733
95/962,935,75914,73619982283788
96/973,064,52314,74120886301880
97/983,222,59114,67322087292891
98/993,289,31914,36222991256850
99/003,269,36213,86123693288970
00/013,485,88313,892251963101046
(Livestock Improvement Corporation Limited Dairy Statistics 2000-2001)
Additional Information Requested for speech notes
** Approximately 12-14KgDM are required to produce 1KgMS.This will vary depending on the cows production efficiency and the time
of the year (I.e. the nutritive value of the feed).
Sheet2
Sheet3
Number of Dairy CowsMillions
First 125 years: Positive outcomes
Strong farming skills + innovation
Established an important industryGrown markets
First 125 years:Negative outcomesLost wealth poor returns on capital + innovation suppressed
Poor skill-base under-developed skills in business + marketing
Unwise reliance on low production costs threatened by genetics + overseas innovation
125 year strategy:Negative outcomes (contd)Weak governance + political leadership leadership is still afraid.Inflexible assets misallocated investment in large, inflexible plantLack of diversification narrow product base
125 year strategy:Negative outcomes (contd)Rights to wealth Those who produce raw milk are entitled to the lions share of wealth created from milk. Not so.
Misplaced faith in pure co-operative pure producer co-ops do not work well in highly differentiated markets.
White gold myth Fs job is to turn milk into cash. Belief that more profit comes from more milk. Not necessarily so
125 year strategy:Negative outcomes (contd)Dont trust outsiders Farmers are unnecessarily suspicious of approaches from business interests Arthur Ward Who the exporter serves Farmers expect F to serve them as producers. Should serve customers. Fixation with control Farmers are not in control. Blind to more efficient ways of gaining control.
Part 2: Mega-merger
Race for Control
McKinseys vs Commerce Commission
Comparison of 1999 + 2001
2001 Negotiations
2001 Decision
Dairy BoardKiwiNZDG35%58%19902000: Race for control
Kiwi v NZDG v Dairy Board Conflict of philosophies: Conflict of egos:Co-operative v corporateSpring v StoreyLarsen v NorgateSingle exporter v competing companiesVan der Heyden v Gent
Inefficiency:Weak pricingInefficient productionInefficient investment Poor Governance:Management control of Dairy Board + KiwiCap on director numbers at Dairy Board (5/13)
Real economic problems
McKinsey advice
- * -
Global revenues NZ$30 billion
Revenue growth 15% pa
ROTGA 15% pa
10 Year Financial Aspiration
Milk Cost$NZ/kg Milk SolidsMilk ProductionMillion TonnesNZAustraliaPolandArgentinaUSAFranceGermanyBrazilNetherlandsAustriaItalyGlobal Dairy Industry Curve
If the US industry were to double its rate of unit cost improvements through biotech while we do nothing, it will have destroyed $5bn of value for NZDI after 5 yearsMcKinseys
- * -
Time
Profit
Horizon 1
Horizon 2
Horizon 3
Extend and defend core businesses
Build emerging businesses
Create viable options
Defend and exploit core low cost positionEarn the right to grow
Industry Milks strategyGlobal slivers in specialised ingredientsLeverage our ingredients network beyond NZ Dairy
Industry biotechnology agendaRisk management services
Growth Horizons
Concurrent management across 3 HorizonsAs we interviewed the executives of our great growers, we found a striking similarity in the way they talked about their enterprises. In every case, the CEO could describe a concurrent set of initiatives across three time periods or horizons. In Horizon 1, the shorter term, these companies have a range of profit improvement initiatives: sales force stimulation, pricing, revenue management, new products and services, and cost-reduction to name a few. In the medium term, or Horizon 2, they have several very powerful growth engines that will mature over the next 3 to 5 years and become major new profit generators. These are typically new businesses that have not yet reached maturity.These companies also have a range of initiatives in Horizon 3 aimed at creating options that might, or might not, be exercised over the coming decade options that would position them to pursue new directions but which do not demand major capital investments in the near-term.
REVENUE GROWTH
$ Millions
$19 billion Horizon 2 and 3Non-core growth
$11 billion from Horizon 1 Core business
Horizon 2 and 3
Project Structure
- * -
FINANCIAL CAPACITY
Total Capital required
Less Debt capacity
Additional capital required
$NZ billions
12
8
4
Fair value Share Std
Externalequity
Retentions
Key - trade off - Retentions/ Entry Fees/ Equity- not an issue until 3-4 years of growth in consumer4 billion over 10 years = 400 million =4c/kgData : reference 60 debt to assets50 assets to sales15 ROTGAShare value average $10maximum $18EBITDA Multiple10-15
Project Structure
- * -
SUPPLY CHAIN STRUCTURE - SIMPLIFIED
Farm
Processor
Merchant
Trading
Ingredients
Consumer
Walk through
Ingredients = Slivers
Merchant - Sales rate- Stock financing- Basic price
OPTION 4AOPTION 3OPTION 6
Project Structure
- * -
CAPITAL / OWNERSHIP QUESTIONS
No
Do we need to structure parts of the business to provide for external equity?
Should the Industry have the ability to differentiate payout?
Should returns from downstream investments be delinked from supply?
Should the Industry maintain a co-operative ownership structure for all parts of the business?
External / Internal equity
OwnershipLinked/Delinked toSupply
Differentiated/Uniform Payout
Corporatevsco-operative
Yes
Yes
CurrentNo*
* Constitutional change required
Summary - choices
Project Structure
- * -
ECONOMIES OF SCALE BENEFITS: MANUFACTURING $ millions annual savings
One Company
50 - 80
Two large companies
35 - 55
Total synergies
Difference between one and two large manufacturers is $15-25 million pa
Key area- Overheads- Best practice - Capex differential
Back up
Project Structure
- * -
Consumer separate subsidiary.
Single company for processing, merchanting and ingredients
OPTION 6
Repeat Key points of Option 6
Project Structure
- * -
SUMMARY
Option 6 is preferable to a pure Option 3 by $800 million if x-inefficiency can be eliminatedOtherwise a pure Option 3 is preferable to Option 6 by $300 million if breakdown of Option 3 can be prevented
We believe that the x-inefficiency can be managed under Option 6
Option 3- Academic/ Pure- highly conservative- huge value loss in oscillation between 3 - 4A
- need to manage inefficiency
Project Structure
- * -
MAKING OPTION 6 WORK
Performance Management
Making Option 6 work
Governance
+
Problem can be broken into two aspects
Project Structure
- * -
EFFECTIVE PERFORMANCE MANAGEMENT
Challenges
Principles
Solution
No transparent milk priceAdministered product prices
Replicate the market
Single independently administered NZ milk priceArms length based transfer prices
Big companyDiverse and complex
Provide farmer choiceOrganise around small performance cells
Separate off areas of business specalisationAccountable, autonomous performance cellsAggressive targets
As read
Comparion of 1999 and 2001 merger proposals
FEATURE
2001
1999
Goal: to grow sales to $30 billion in 10 years
Yes
Yes
Goal: to save $300m pa
Yes
Yes
Merge Dairy Board, Kiwi and NZ Dairy Group into one mega co-operative
Yes
Yes
Deregulation in 12 months
Yes
Yes
Commerce Commission approval required
No
Yes
Sell 50% of NZ Dairy Foods
Yes
Yes
$15 billion of new capital
?
Yes
An extra $4 billion of new share capital from non-farmers
Promoters
now say no
Yes
Separate A shares for manufacturing + exporting of NZ milk
No
Yes
Separate quota shares (Q shares) for farmers
No
Yes
Trading of A shares among farmers within band of 80-120% of supply
No
Yes
Farmer choice to invest in new overseas consumer-market ventures
No
Yes
Separate vehicle to for new overseas consumer-market ventures
No
Yes
Relative simplicity of withdrawing capital
Lower
Higher
FEATURE
2001
1999
Avoid special Government regulations and regulator to oversee mega co-op
No
Yes
Requirement on mega co-op to sell milk to competitors
Yes
No
6 year phase-out for automatic holding of quota rights by mega Co-op
Yes
Yes
Farmer-owned Quota Company to hold and tender quota rights after 6 years
No
Yes
McKinseys claimed benefitsPreviously identified (BDP/IEIS)130 Integration of manufacturing 50Interface simplication 30Catalytic event 100Total $310m
$8b Merger
Industry claimed gains: $180mCommerce Commission draft view:
Maximum gross gains: $92m
Productive efficiency losses: -$192
Dynamic efficiency losses: -$500m
2000/01 Negotiations
NZDG:Chairmen: 1998 2002CEOs: 1998 2002 NZ Dairy Board:Chairmen: 1998 2002 Change in people
Pure co-op + single exporter:More corporate + competing exporters:SpringRoadleyYoungGentBoothBayliss
Storey FraserCalvertAllisonVan der HeydenRattrayTownsend
Differences of philosophyNo longer directors
NZDGPure co-op viewMore corporate viewKiwi DairySingle entityNo outside directorsNorgate as CEONo Equal value sharesNoNZ Milk as co-opYes outside directorsSomeone elseCorporate mechanismsNoNZDG control of Dairy Board(58% control)Partial floatTwo competing exporters (Project Eagle)
Wellington, Oct 13, 1998, NZPA - Retiring Dairy Board chairman Sir Dryden Spring today put the boot into the Government's plan for the deregulation of producer boards, describing it as a gigantic economic hoaxDairy Board chairman Sir Dryden Spring is adamant the industrywill remain farmer-owned and continue selling through a single marketer owned by the co-operatives following deregulation
Decision 2001 In Brian Edwards biography PM comments that she shot a line across officials and gave directions that the legislation was to be prepared authorising the merger. It appears that Dryden Spring was a key player
Part 3: Changes
Nature of Fonterra
Four fundamentals
Eight specifics
Drivers of change
To serving customers to capture the value they put on different products and servicesFonterra is a structure in transition:From serving producers and appeasing their competing perceptions of fairness
Farmers need to receive from F real signals of how customers value their products
Fonterra needs to receive from shareholders real signals of how they value Fonterras performance.
Key changes neededFarmers need to develop new skills to participate as shareholders, not just as producers
Directors need to provide some real leadership
Surplus milk F would pay the true marginal value of surplus milk (ie it charges full costs for processing an extra unit of milk) Volume + price F would offer suppliers a choice of contracting options, eg fixed volumes at fixed prices set in advance; no fixed volume at spot prices; or part fixed, part open.Dividends Paid out to farmers as a separate dividend (esp NZ Milk)Key changes needed(contd)
Share value + monitoring Make Fs co-op shares are tradable among farmers within 80-120% of their supply This would provide on-going (not just annual) and multiple (not just a single valuers) signals to F of how shareholders value its performance. It would also significantly reduce Fs current redemption risk, which is like a run on a bank, where farmers all at once want to cash up their F shares. To mitigate this risk, F has put in place a number of devices, including its option to redeem not with cash, but by issuing redeemable preference shares and capital notes. F has also imposed a tight window on when shares can be redeemed.
Key changes needed(contd)
Value added business Separate NZ Milk. Share tradable among farmers. Later open to outside investors (up to say 49%). Board of directors Reduced to nine as originally proposed.The current number (13) is simply a carry over from the Dairy Board and (before that) the Dairy Products Marketing Commission (since around 1947) Diversify beyond milk Use skills and some risk capital to capture margins in new marketsKey changes needed(contd)
F reduce market share in NZ Sell down enough of Fs business in NZ (10 15%) to end restrictions of Government regulations. Gains from maintaining a near-monopoly in NZ, particularly in processing raw milk, are unlikely to outweigh the costs.
Between 1890 and 1920, the market for processing raw milk was highly competitive in NZ. The co-operative culture viewed this competition as pernicious as some co-operatives failed.
Introducing a competitive environment is likely to boost Fs performance, to the benefit of farmer-shareholders.
Key changes needed(contd)
Drivers of changeConsumer competition need to be more customer driven and less capital constrained
Supplier expectations big vs small, and generational changeOver time, pressure will grow for cross-subsidies to be removed, leading to user-pays transport costs, fixed collection fees and regional milk payouts
The story of two Henrys
Henry ReynoldsHenry NestleIn 1886, Henry Reynolds created Anchor brandIn 1867, Henry Nestle created Nestle brand Two different paths, two different strategies.How did each business fare?
Henri Nestle was a merchant and small-scale inventor.1947: Purchased Maggie1867: Invented the worlds first solid infant formula using Swiss milk 1905: Moved into condensed milk 1930s: Moved into coffee (Nescafe) Not coffee (beans) the commodity. Nestle created freeze dried and granulated instant coffee.1929: Moved into chocolate (Nestle)1963: Purchased frozen food giant Findus
Henri Reynolds was a businessman. 1896: Sold factories to NZ Dairy AssociationAnchor brand remained tied to one key product NZ butter in England [ ]: Merged to form the Big Octopus NZ Cooperative Dairy Company
ConclusionIndustry founders shared goal was to be free men. Not servile or afraid The goal has not been achieved The key is thinking with a free mind. Look outside the box
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