I heard a hilarious story about a family friend who arrived at their holiday house after some months of absence, only to find a line of sapling pines had been planted along the boundary fence. This looked likely become contentious as they grew into giant, needle-dropping, lawn-poisoning trees.
The solution in this case was for a clandestine mission in which the offending trees were removed below ground level by chainsaw, and a new sod of lawn carefully placed over the remainder of each stump. One can imagine the surprise of those neighbours when they returned to their property – “I’m sure I remember planting a line of trees there…”
We might be forgiven for thinking that Fonterra regards the newer dairy companies in much the same way that those sapling pines were viewed. That is, unwelcome and dangerous to the established order. They quite rightly expect competition for resources and milk to intensify as each party looks to grow.
However, with the regulatory watchdog ever-present a simple excision of the offenders is simply not possible. So Fonterra has had to come up with a different approach.
Back on the subject of trees, the art of Bonsai comes to mind. This involves cutting back the roots of a tree such that its access to nutrients is limited and its growth stunted.
The art of Bonsai is to limit growth while still maintaining the form and aesthetic appeal of the tree. This is relevant, because Fonterra’s proposed introduction of “trading amongst farmers” (TAF) looks like it could “bonsai” some of the newer, smaller dairy companies by cutting off a ready supply of defecting Fonterra shareholders.
As a result those companies will probably still look like competitors, maintaining an important aesthetic required by the regulator, but the fact is that they won’t be.
The official communications about TAF have focussed on how it removes redemption risk for the cooperative.
The other side of that coin is that it makes it much more difficult for suppliers to defect with their capital intact. Fonterra is no longer obliged to redeem shares, and instead a defecting farmer will need another farmer to buy their shares.
Logically this limits defections to the rate of milk growth within the cooperative, unless defectors are willing to leave their capital within the cooperative.
It will hence make it difficult for any new dairy company to establish a new milk powder drier of any great scale and rapidly fill it by poaching milk from Fonterra’s supply base.
As a result, new dairy companies will have to find new dairy farms, or suppliers who can expand their operations. That is, new milk supply. There is still scope for this in certain areas of the country.
But Fonterra’s supply from fully developed regions will be much more secure against poaching by newcomers. Perhaps this is a good thing for New Zealand, as aggressive competition for supply in Australia over-capitalised the processing industry and brought it to its knees only ten years ago. It is certainly a good thing as far as the management of Fonterra are concerned.
Whatever the outcome, it remains to be seen whether all the new companies will successfully secure new milk, or if some of them will be “bonsai’d” and simply cease to expand.●