Oranges and One Apple

I admire Tatua Dairy Company, the little dairy cooperative on State Highway 26 just outside of Morrinsville. In 2001 their shareholders, along with shareholders of fellow dairy cooperative Westland, voted not to join the newly created Fonterra. They backed themselves that they could do a better job alone, and they were right. Their last three years of milk payouts have been \substantially higher than that paid by Fonterra.

Westland, unfortunately, have not fared so well and was sold to Chinese dairy company Yili Group in 2015.

Many others in New Zealand must also admire Tatua as it is next to impossible for me to praise Fonterra’s performance without comparisons being made to the tiny processor. Some comments are tongue in cheek, made by people with a working knowledge of the dairy industry, and others are sanctimonious and immediately betray the ignorance of the person making the comparison.

Comparing Tatua and Fonterra is like comparing apples and oranges; both are fruit, or in this case cooperative dairy processors, and that is where the similarities end. Last season Tatua collected 1.48 million kg of milk solids while Fonterra collected 1,480 million. Due to the difference in size, it is perhaps more accurate to describe it as a comparing a single apple to a pallet of oranges.

Imagine if you will, through a stroke of legislation, that Tatua had to operate under the same rules as Fonterra. The closed cooperative that tightly controls the entry of new milk supply now would have to open their doors to all comers, and who wouldn’t want to supply Tatua?

These new suppliers could live almost anywhere in New Zealand, so Tatua would need to develop a network of tankers and factories across the country, complete with the staff required to run them. They must be capable of processing all the milk that comes to them during spring which is peak milk season. For a majority of the year these factories will not be running at capacity, and this will have financial implications for the cooperative.

Tatua may be inundated with suppliers whose milk they could only refuse to accept on very limited grounds. When they decline a potential supplier, they may find themselves in court defending the decision, so they would need to increase their legal team. As they will also be subject to review by the Commerce Commission every year, the lawyers will be kept busy.

Since Tatua are now playing by the rules that govern Fonterra, a substantial portion of that product would have to be sold at a global public auction to provide price transparency. This auction would be designed to set a floor price for their products rather than a ceiling, and Tatua would be required to pay the Commerce Commission to comb through the results and decide if the price being paid to farmers was the highest possible.

If someone wanted to set up in competition with Tatua, the cooperative would now be legally obliged to provide the new competitor milk at cost price for three years while that competitor secured their own supply.

The fact is that Tatua and all the independent processors play by a totally different set of rules than Fonterra does, yet no other processor gets the public attention that Fonterra does.

Miraka, an independent dairy processor near Taupo, claimed $900,000 in Covid-19 wages subsidies despite exports to China increasing during this time. Fonterra and Tatua claimed nothing.

Synlait, whose recent woes are well documented, have never paid a dividend to their shareholders and this year posted a loss.

Mataura Valley Milk, another independent processor, also claimed the wage subsidy and have yet to make a profit.

None of these independent processors are hamstrung by the legislation that binds Fonterra, yet none of them can emulate Tatua’s success. This state of affairs leads me to conclude that smugly asking why Fonterra can’t pay at the same level as Tatua betrays a lack of even basic understanding of the rules governing the dairy industry.

Tatua should be celebrated, their success should be held up as an example for all to try to emulate. The independent processors should benchmark themselves against Tatua instead of Fonterra, for that’s where the similarities lie, and people who comment on the dairy industry should first make sure they know the difference between an apple and oranges.