How Australia can win the milk war

Australia can be the major player in international dairy. If Murray Goulburn can acquire Warrnambool and keep Canada out, it will be able to match the mighty New Zealand.

The deputy leader of the National Party Barnaby Joyce and Liberal Trade and Investment Minister Andrew Robb have the chance to unite to give Australia a real chance to be a significant player in the looming global dairy boom.

And Joyce and Robb need to look no further than New Zealand to be shown how a country wins in dairy. And Canada shows them the value of national champions.

The New Zealanders, by act of parliament, united their cooperatives to give farmers volume and to enable modern milk processing plants to be constructed.

Apart from the farmers, the company that emerged as the big winner from achieving scale in New Zealand was Fonterra, which has minced the diverse Australian exporters. Fonterra has various Australian operations but its major investment went to New Zealand where it achieved the required scale to rip Australian dairy to shreds. Australian dairy’s share of global export markets has halved from 15 per cent in 2002 to 7 per cent in 2012. Fonterra lifted the New Zealand share from 30 per cent to 37 per cent over the same period.

Using the advantages of Fonterra’s scale, New Zealand increased volumes by 3.5 per cent per year from 2002 to 2012, Australian production declined by 1.7 per cent over the same period. Fonterra might try and block Murray Goulburn from gaining scale in Australia by bidding for Warrnambool, which has about 10 per cent of the Australian milk processing market.

The Canadians can see great growth in Australian dairy due to the escalating demands from the rising middle class in China and Asia. The Canadians service Asia from Argentina but want to be part of the Australian action. But they will need to go on a massive Australian raiding exercise to get the required scale to compete with the New Zealanders.

Both Joyce and Robb will remember how the Canadians treated Australians when we went onto their growth patch. The Canadians believed that phosphate in Canada was like dairy to Australia and would be a major driver of national wealth for decades ahead. Accordingly the Canadians declared that was not in the Canadian national interest for an Australian company, BHP, to acquire the Canadian leader (It was permissible for ‘The Big Australian’ to start from scratch in phosphate). Given China’s growth, dairy for Australia has the potential to be even bigger than phosphate for Canada and the cooperative company owned by the local farmers (Murray Goulbourn) is prepared to bid above the Canadians to gain scale. In those circumstances the Canadians will not be surprised if Australia acted in the same way as Canada when it comes to national interest.

Murray Goulburn is one if the few food processing groups in Australia – and the only major dairy group – to understand that the key to prosperity is to have the best possible plants, the best possible work practices and big milk volumes.

And so Murray Goulburn’s current base export business is conducted via state of the art plants. Similarly, to be a long term significant dairy player in local milk consumption, a milk processor must, as well as the best possible plant and best possible work practices, have major scale. Murray Goulburn currently is not a player in the local consumption milk market but earlier this year signed a deal with Coles that gave it volume and the assured cash flow to enable Murray Goulburn to raise the funds to finance two state of the art milk processing plants. While the internationally owned milk processors who currently dominate the Australian consumption market have improved their operations with investment they have not bitten the bullet and erected state of the art plants.

The new Murray Goulburn/Coles contract plants are currently being erected in Melbourne and Sydney and the banks, led by the National Australia Bank, ANZ and Westpac can see what is ahead and so are prepared to back the Murray Goulburn bid for Warrnambool partly on the basis of the expected Coles contract cash flow.

Murray Goulburn wants to add Warrnambool’s excellent plant to its network, but most importantly an acquisition of Warrnambool would gain scale for Murray Goulburn and get it closer to matching Fonterra and the New Zealanders.

The cooperative structure enables the benefits of that volume to go to farmers who can then improve their balance sheets and transform the economies of their operation.

That’s what New Zealand did and it is what we must do. I can’t imagine the regulators preventing fair competition with New Zealand. The Canadians cannot help Australia on scale, while if Fonterra wants to be a serious bidder it will have to explain why it decided to boost New Zealand over Australia. If Bega wants to win the auction then nothing will stop it but Warrnambool alone will not give Bega the scale to match New Zealand.