Strategies for the NZ Dairy Industry

Possible Strategies for the NZ Dairy Industry

An industry strategy has value in the thinking and ideas it engenders during formation. Once documented it can be used as a base to measure progress against. For the latter reason there can be some reluctance by those in positions of power to having clear strategies agreed, widely known and well documented.

Through the 1990’s NZ dairy industry leaders evolved a strategy to address issues facing the industry at the time. The process was in house and opaque to most industry participants. The strategy formed through this process to 1999 may be documented or informal. If it is it is documented it is hard to find. Either way it was instrumental in guiding the direction of the industry towards a single Mega Co-operative.

Aspects of the strategy can be inferred. Until recently Fonterra recorded in its history the following points on its formation:

  • 1999 - Pan-industry strategic plan agreed. A three-fold revenue increase in 10 years is targeted.
  • 2000 - Industry chooses one single mega company as best structural option to implement its strategic plan.
  • 2001 - Farmers vote to form new company - later named Fonterra Co-operative Group.

The dairy industry history currently provided on the Fonterra website omits any mention of strategic plans. While including some factual information, the history appears not to have benefited from any contribution by an historian.

Dexcel makes references to their 4% annual productivity improvement target being part of the dairy industry strategic plan.

Another reference is the address by Mr. John Storey, Chairman, New Zealand Dairy Board to the New Zealand Dairy Expo, Jan 27, 1999. Payout Not Politics – Delivering Better Returns to Farmers.

The dairy industry strategy circa 1999 created expectations of major industry benefits including increasing co-operative share prices, market power, greatly increased industry revenue, greater efficiencies and higher payouts arising from the formation of a near monopoly mega co-operative. This defied the majority of economic analysis done at the time, but industry and political leaders executed the strategy regardless.

Such as the strategy is known, it seems to have for the most part failed. Certainly to meet expectations of market power, greatly increased revenue, or adding value. Restructuring of the mega co-operative is now required.

Before considering any restructuring of the majority of the industry’s processing and marketing capacity, it will have been necessary to review the 1999 industry strategy and its successors in light of the 2007 world dairy environment.

The processes for, and outcomes of, such a review of industry strategy are unknown. The structures and leadership roles responsible for the evolution of strategy through the 1990’s disappeared with the formation of a mega co-op. If these were considered unnecessary, forgotten or established elsewhere is uncertain? What is clear is that a documented current dairy industry strategy is difficult to find.

Current outcome regards strategy will lie between two extremes outlined in the following. Where on this continuum the dairy industry currently is a fertile basis for discussion.

The mature political approach:

  • Industry has a clear strategy developed by consensus, widely understood and well documented
  • The strategy defines how the industry coexists with other sectors of the economy and public policy
  • Industry leaders endorse the process, but strategy development is not a top down process but rather an open, iterative circular process with information and ideas moving in all directions
  • Responsibilities and accountabilities for delivering aspects of the strategy are clear and unambiguous
  • The strategy is constantly being reevaluated in the light of extensive analysis, but any change is debated, evolved, and agreed within and beyond industry interest groups before being adopted
  • Farm producers, processors and support industries have some certainty about the environment in which they are working and making decisions

The ineffective and/or dysfunctional approach:

  • Missing structures or institutions with industry leadership as part of their roles
  • Instead best practice, efficient until dysfunctional institutions without any collective glue, then restructuring ad infinitum
  • Concentration of power and information in a single entity – market power over suppliers, but little market power with buyers
  • Closed strategy undocumented and/or unavailable to mainstream industry players
  • Uncontested analysis from within house – limited range of ideas and entrained thinking
  • Responsibility and accountability for industry strategy opaque
  • More of the same, slow response/adaptation to changing environment
  • Erratic and unpredictable change when it occurs
  • Limited capacity to address failed strategy
  • Reflects inadequate leadership and planning

In terms of a dairy industry strategy major aspects are likely to interrelatedly include:

  1. Industry structures and leadership to provide sound analysis (especially economic) and evolving a sustainable strategy for the future
  2. Sustainability
    • Economic
      • Productive or asset gains
      • Amount of value added
      • Where capital is sourced
    • Environmental
      • Making optimal resource allocation
      • Meeting externalities
      • Efficient production with minimal energy inputs
    • Market
      • Is there to be a country based industry brand image
      • Are all aspects of sustainability an integral part of it
      • Is the industry meeting its costs, or is over production subsidized
      • If the focus is on high value markets, clean up the dirty low cost commodity image
  3. Accommodation with the public
    • Critical political communication process
    • Expect no accommodation if dairy farmers are over producing simply to maximize untaxed capital gains at the expense of taxed income
    • Farmers, vested interests from academics to financiers to farm developers, and industry leaders need to greatly expand their thinking, and some become much more humble
  4. Relationship with other economic sectors, at least tourism
  5. Industry ownership and structure at farm, processing and distribution levels
  6. Choice between a higher value information and analysis driven industry, or a lower value production focused one

How can this be done? John Storey proposed the following in response regards similar issues in his address to the New Zealand Dairy Expo in 1999 “A first step is for farmers to consider these issues, and debate them openly, and begin to think like active shareholders rather than passive suppliers of milk. Any mandate for change must come from farmers” He went on to suggest talking to a range of industry institutions and representatives including the Dairy Board.

Many of opportunities to talk that existed in 1999 simply aren’t there now. There is a structural issue in that industry leadership and the formulation of industry strategy got forgotten or was ignored in the merging to form Fonterra. Why would a co-operative such as Fonterra agree to air their strategies in public? There appears to be a requirement for effective leadership at many levels but with current structures limiting formal opportunities.

Other countries though provide excellent information on their dairy industry strategies and performance. Dairy Australia provides exactly the structure required, and three-year reviews of performance: Dairy Australia 3 Year Review

The industry has six broad strategies or combinations of options listed in order of increasing sophistication:

  1. Dairy farm production and commodity supply
  2. Farm production with significant other value being added from processing, marketing and distribution
  3. The preceding as the basis to drive other industries – education, research, technology, consulting and tourism
  4. Consumer brands business
  5. All of the above but with a dysfunctional approach
  6. All of the above with a mature approach and consensus

All except option four fail without ongoing milk supply. Option five tends to be the default in mature industries without adequate structures and leadership.

The default is not attractive and appears to be an analytically deficient, production focused, subsidized, high cost, debt ridden commodity dairy industry paying lip service to sustainability, the environment, greenhouse emissions and unable to add significant value to an increasing volume of production.

There is little understanding and sometimes out and out denial of issues around how the world are changing – issues of globalisation, the impact of energy and climate change where NZ should be positioned for competitive advantage.

Other issues include ownership and land aggregation. There is no economic analysis to suggest that large farms are other than vehicles for asset appreciation or more productive than owner operator units.

The dairy industry has some very positive possibilities not dependent on commodity price booms but requiring an intelligent broad based industry consensus on lower production aimed at higher value markets.