John Edmunson
The Spark Dec 2007
The biggest business story to hit the news in New Zealand this November was the much-rumoured announcement that the board of Fonterra Co-operative Group Ltd would put a proposal for a partial share float to its members for a vote.
The proposal would see the co-operative’s farmer owners retaining 100% ownership of the existing Fonterra co-operative, which would continue as a holding company. All its assets would be transferred to a new company, 65% owned by the co-operative, and a further 15% through an issue of shares to the farmer owners of Fonterra. The 20% remaining would be floated on the NZX (stock exchange), making Fonterra New Zealand’s largest publicly-owned company. The proposal requires a 75% majority in the initial vote, followed by a second 75% vote in favour in two years time.
Various “safeguards” have been proposed, many being of a crude nationalistic nature. The safeguards include limiting overseas ownership to 10%; retaining headquarters in New Zealand; and an agreement already reached with the government for legislation to prevent farmer ownership ever falling below 35%.
Currently, Fonterra is a producer co-operative, owned by nearly 11,000 farmers, about 95% of all dairy farmers in New Zealand. It was formed in 2001 by the merger of the country’s two biggest dairy companies, in an ongoing process of mergers and concentration. By comparison, in the 1930s there were more than 400 milk-processing companies.
Unlike some co-operatives, Fonterra does not operate on a “one member, one vote” basis, but on a system of shares issued in proportion to the amount of milk produced by the farmer. Currently, the largest single shareholder owns about 2% of the company. Farmers who increase their milk production are entitled to buy additional shares, while those whose production declines can sell theirs. Shares cannot be sold on the open market, however, thus retaining complete farmer ownership in the company.
While Fonterra is structured as a co-operative, in virtually every respect it is identical to any normal capitalist company, particularly those which do not have their shares floated on the share market. Fonterra has assets worth $12.63 billion and annual turnover of $13.9 billion, and employs 16,400 employees. Any non-farmer workers in the industry, such as the truck drivers who collect the milk from the farms, or workers involved in any other part of the process, are simply employees or contractors as in any other business.
Dairy farming has a long history in New Zealand, beginning in 1814 with the importing of two heifers and a bull. Throughout the 1860s and 70s, land confiscations in the Waikato and Taranaki allowed rapid expansion of the industry.
Dairy co-ops were first established in the 1870s and have been the standard form of ownership of dairy factories since the early 1900s. Dairying is now New Zealand’s biggest export industry, and Fonterra is New Zealand’s biggest company and the world’s biggest dairy exporter.
In the last 20 years, the land used in dairy farming has increased and sheep farming has declined. Before the recent boom in the dairy sector, running sheep was the dominant type of farming in New Zealand. High prices and a guaranteed market in Britain for all the lamb and wool New Zealand could produce meant sheep farming was highly profitable, and all sorts of marginally suitable land was utilised. Sheep farming is not particularly suited to areas with very high rainfall, but even areas of Southland farmed sheep.
With the collapse of the British market and the rise in global demand for dairy products, there has been a frenzy of farm conversions, resulting in the opposite situation. East Coast land is now heavily populated with huge, intensively stocked dairy farms, placing extra strain on river systems due to effluent runoff and the irrigation demands of a water-intensive industry.
In Canterbury, for example, dairy land has expanded by 132% since 1995. Between 1990 and 2003, the number of sheep in Canterbury declined by 24% while the number of dairy cattle increased by 390%.
Farm size and herd size have both grown, but the number of actual farms has fallen. From 1994 to 2002, the average dairy farm size increased by 143% from 102 hectares to 146 hectares, and the total national herd rose from 3.9 million to 5.2 million, an increase of over 130%. During the same period, the total number of farms fell from about 16,800 to about 14,000, a drop of over 16%.
This change has been a result of farm mergers and buyouts. Dairy Holdings, probably the largest corporate dairy farmer in New Zealand, currently owns 53 dairy farms and eight grazing blocks in the South Island. This concentration of capital will continue regardless of the outcome of the Fonterra vote.
