Friday, 3 May 2019

In a regulatory moo-d

The latest Auckland seminar from LEANZ - the Law and Economics Association of New Zealand - brought together a panel of experts on the theme, 'What's Right and What's Wrong with New Zealand Dairy Sector Institutions?'

An important issue at any time, but especially on the money right now with the current review of the regulatory Dairy Industry Restructuring Act (DIRA). So far (according to the Review website) it's reached the stage where it's analysing the submissions on the discussion document it put out last November, and the Review team is now working on policy recommendations for regulatory change. Unless I've missed it, there doesn't seem to be a master list on the site of all the submissions received, but google a bit and you'll find some of the main players' views. Fonterra's are here.

The LEANZ panel was a battle-hardened bunch of dairy experts: in alphabetical order Tony Baldwin, business consultant, A E Baldwin New Zealand; Phil Barry, Director, TDB Advisory (his LEANZ slides are here, well worth a look); Alex Duncan, Consulting Economist at Finology; and Alex Sundakov, Executive Director at Castalia.

It would be nice to say I came away with all the moving parts neatly analysed and clarified and put into a tidy box, but - in the nicest possible way - I didn't, and that's fine. As Mencken's Law says, "For every complex problem there is an answer that is clear, simple, and wrong".

That said, I can't say I was totally disabused of the notions in my head before I went into the seminar, either. 'National champion' strategies are to my mind poor plans (see here and here) and I think the Commerce Commission got the right end of the stick when it proposed in 1999 to disallow the merger that ultimately (via DIRA) became Fonterra (I dug out the details here).

They may not have settled down into a coherent whole, but some of the ideas I took away from the seminar were:

  • I liked Tony Baldwin's exploration of deep-seated, long-standing cultural norms in the dairy industry (including worship at the altar of 'white gold', dislike of competition, a wariness of markets in general and outside capital in particular, a strong desire for government involvement/support) and which, he argued, are still in play today and will continue to shape wherever we go next. Tony tells me he's polishing up his slides with extra commentary, and I'll post a link (and maybe some discussion) once they're ready. Alex Sundakov wasn't greatly minded to traverse 'old history' and suggested we should focus more on what's in front of us today, and there is that, but Tony's story still seemed highly relevant to me. Tony also concluded that the current regulatory structure can't deliver the strategy it's committed to, which I'm leaning towards as well. On similar lines Alex Sundakov also argued that existing institutional mechanisms aren't able to accommodate necessary market adjustments
  • Alex Duncan, who I last encountered when he took the Commerce Commission for its first walk through the intricacies of the milk price manual, made an intriguing point. The mantra in dairy has been 'value add': he questioned that. He felt that the ingredients business - your powders, your casein - could be the real money-spinner, because it has the production flexibility to turn out whatever pays best on the day, especially if a deeper futures market develops and enables it to lock in transient opportunities or sell-off existing positions if better ideas turn up
  • The seminar was largely free of entrenched  'pro Fonterra' and 'anti Fonterra' attitudes but still accommodated some discussion of Fonterra's calculation of the farmgate milk price. In  principle Fonterra could raise the input costs of competing processors via a high price. In practice, that's hard to square with evidence of profitable new entry (see for example Phil Barry's Slide #7) or with the potential discipline from investors in the Fonterra Shareholders' Fund who have an interest in making sure the dividend is not disadvantaged by an overly high farmgate price. Though, as someone said at the seminar, what effective recourse do they have other than to sell out of the FSF? 
  • Alex Sundakov was somewhat bemused by the Kiwi predilection for froofrooing over whether regulation is necessary and what form it should take, and said that the Aussies tended to go "Bang! You're Regulated!" (my summary). Fair point - policy analysis in New Zealand has typically been, let's charitably say, exhaustive (don't get me started on reform of s36 of the Commerce Act). But I'm not sure he's right in this case about the Aussies' pace. The ACCC proposed a mandatory code of conduct for the processors who buy the Aussie farmers' milk back in April 2018, itself the outcome of an 18 month inquiry started in 2016. The draft code surfaced in March this year: who knows when (or if) the regulation will go live. And in any event, ditherers or not, Aussie code or not, dairy farmers in New Zealand are much better protected from oligopsonistic market power than their counterparts across the ditch.
A fascinating evening. If you're not on the LEANZ mailing list, subscribe. If you're yet not a member, join up. And thanks too to Richard Meade who organises the Auckland events, and to Bell Gully for the generous hosting that makes these seminars viable.

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