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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