GUEST BLOG: Geoff Fischer – The Follies of Fonterra: Analysing the Lactalis deal

The New Zealand dairy cooperative Fonterra has agreed to sell its “consumer products” operations to French global dairy company Lactalis.

In response New Zealand political leaders (with the exception of Winston Peters) have been quick to assert “It is the shareholders’ right to decide” and offered no further comment. Christopher Luxon, Chris Hipkins and David Seymour all agree on that much.

Yet the statement that “It is the shareholders’ right to decide” is a self-evident legal fact which really goes without saying. Does it mean that the rest of us should not have or express a view on the matter?

Some have tried to argue that, but all the indications are that public opinion is strongly opposed to the Lactalis deal.

Every New Zealander is a “stakeholder” in the dairy industry because it generates such a large share of the national income. It directly employs tens of thousands, indirectly provides employment to thousands more and adds a significant amount to government tax revenues. If it makes decisions which serve the short term interests of shareholders but result in reduced income, employment and tax revenues over the longer term, then New Zealanders as a whole will suffer.

We may not have the right to decide, but we do have the right to know what is going on and the right to offer judgement. As citizens and human beings we want to know about the things that will or could seriously impact on our lives. That is not just out of idle curiosity. Neither is it a case of sticking our noses into someone else’s business. Fonterra is a business monopoly created by an act of the New Zealand parliament. It is not like a corner store that will go out of business if it makes bad decisions, only to be replaced by a smarter operator a fortnight later.

If Fonterra’s shareholders make decisions that adversely impact the national economy then the consequences may be serious for all of us.

Our right to know is also a fundamental principle of capitalist ideology, in which everything depends on the market and therefore everything must be known in the market. This is the basis of the free market principle of “perfect knowledge” which is the antithesis of the claim to “commercial confidentiality” so often invoked by capitalist governments and monopolistic corporations to keep “the market” (that is, in this context, the people) in a state of deep ignorance.

To be frank, we actually know very little about the Fonterra/Lactalis deal, and we have been told even less by Fonterra. So let’s take a look at what we do know.

The media are telling us that Fonterra has sold its “brands” or its “consumer business”. In reality the sale appears to affect what is known as the “Mainland Group” and to comprise a number of businesses which own the brands Mainland, Anchor, Kapiti, Perfect Italiano, Western Star, Ratthi, Chesdale, Fernleaf, Anlene, and Anmum among others and 16 commercial sites (some say 17 and others say 18, probably due to formal separation of more or less contiguous sites) in Australia (Cobden, Stanhope, Darnum, Spreyton, Wynyard, Bayswater, Campbellfield, Tullamarine 1, Tullamarine 2), New Zealand (Takanini Auckland, Bridge Street Eltham and Makomako Rd Palmerston North), Sri-Lanka (Biyagama) , Malaysia (Dairymas and Susumas), Indonesia (Cikarang) and Saudi Arabia (Dammam).

The media has made much of the “iconic brands” like Anchor and Mainland, but in reality they are just brands, and the role of brands in capitalist economics are vastly over-rated by that relatively small group of people whose income derives from making or exploiting brand power. Brands come and brands go, and while New Zealand householders might complain about the price of a block of butter, they will not be too fussed over whether its wrapping is adorned with an anchor or a fern leaf.

“Manufacturing facilities” (“sites” or “factories”) need to be taken more seriously because they employ real people and produce real goods. As New Zealanders we should be primarily concerned with the three New Zealand production sites and the plans for their future. The overseas sites are of interest mainly through their potential to take production away from the three New Zealand sites. Is that a realistic possibility? To be frank, I would have to say “I don’t know”. I just assume that Lactalis could produce the commodities of its New Zealand factories in its other countries of operation either from local raw milk supplies or from dried product or a combination of both. It would only continue production in New Zealand over the long term if the New Zealand factories had a competitive advantage in the production of value-added dairy products. That would be the case if the New Zealand inputs (labour, plant land and buildings, energy and raw materials) were cheaper or the economy of scale was greater in New Zealand than elsewhere. Yet that seems unlikely. New Zealand does not have industrial economy of scale, and it does not have cheap inputs compared with, say, Australia. It is the challenge posed by the Australian operations that should most concern New Zealand dairy workers and Lactalis has indicated that as a result of the Fonterra deal “4300 employees will strengthen Lactalis Australia workforce”. Evidently there will be no “Lactalis New Zealand” let alone a “Lactalis Aotearoa”. The Fonterra factories will have the same status as branches of ANZ or Westpac, Woolworths or Bunnings and they will be run by Australian managers in the interests of the French owners – more or less. Fonterra does not reveal the number employed at its Takanini, Eltham and Palmerston North sites, but presumably these are the numbers to be added to “Lactalis Australia workforce”. Will they remain in New Zealand, or will those workers and their jobs be physically transported to Australia? No one is saying.

The short answer is “Almost certainly not” because such a condition of sale would have resulted in a massive discount being applied to the purchase price with no advantage to the seller, Fonterra.

Only if the economics of maintaining production in New Zealand are better than the economics of shifting plant, key workers and production to, say, Australia and selling off the land and buildings in New Zealand.

Lactalis presumably has other options. For example it could buy raw milk off Fonterra and contract Fonterra or some other dairy powder producer to convert it to powder.

Fonterra has been less than candid about its agreements with Lactalis. It says “Fonterra will continue to supply raw milk, dairy ingredients and products to the divested businesses under long-term supply agreements”.

The Raw Milk Supply Agreement is for Fonterra to supply 350 million litres of milk per annum to Lactalis for a minimum period of ten years from the date of agreement. The price is based on Fonterra’s farmgate milk price. But we are not told whether Lactalis must accept that volume of product, or whether Fonterra must supply that volume, or whether one or the other party can withdraw from or amend that arrangement. Presumably Lactalis is obliged to accept that volume of product for the next ten years if required to do so by Fonterra, but what they do with that raw milk would be their own business. The Raw Milk Supply agreement covers only 7% of Fonterra production and reportedly adds 12% to Lactalis Asia Pacific and Europe, Middle East and Africa milk supply. With those numbers, neither Lactalis nor Fonterra need feel committed to added-value production in New Zealand. Fonterra has already made the decision to opt out of the business. Could not Lactalis follow suit?

Recent history suggests otherwise. When Lactalis bought up Italian dairy companies in 2023 it closed factories in Reggio Calabria and Tuscany.

Wikipedia also notes “In August 2016, French farmers blockaded the company’s headquarters in Laval, protesting what they saw as price fixing.

In 2020 allegations were made that 38 of Lactalis’s production plants in France had breached environmental regulations, and had been doing so for a number of years…

In July 2023, Lactalis Australia was fined A$950,000 by the Federal Court for breaching the Dairy Code of Conduct in 2020…

In February 2024, the Spanish … fined Lactalis 11.69 million euros for forming a cartel with other milk companies to avoid competition when buying milk from Spanish farmers between 2000 and 2013…

In February 2024, police officers .. raided the offices of Lactalis as well as its CEO’s private mansion on suspicion of tax evasion. Lactalis is the target of a preliminary investigation… into aggravated tax fraud and aggravated laundering of tax fraud”. Tax fraud, price fixing, and environmental offences may not be unusual among global corporations, but these cases do indicate that Lactalis is no knight in shining armour.

The principle argument for divesting the Mainland Group seems to be that the Group has a lower rate of return on capital than the milk powder business.

Yet a business which disposed of its least profitable product lines would eventually end up with just one product to sell or no business at all. (Although not a direct parallel, consider the likely fate of a supermarket which stopped selling bread). This is what I categorize as “the first folly” of Fonterra and its shareholders.

Pursuing the highest rate of profit (“rate of return to capital”) to the exclusion of other factors (broadly, strategic factors, which includes social and public good concerns) inevitably leads to a narrowing of the range of production by specific enterprises, localities and regions. The changes in the New Zealand forest industry, which has certain similarities to the New Zealand dairy industry, over the past half century demonstrate the consequences of seeking to maximize the rate of return to capital “across the board”. In forestry, radiata pine produces a higher rate of return to investment than any other species of production forestry tree and it does so in almost all localities. Therefore, commercial growers plant radiata pine to the exclusion of almost every other species (including species which can return higher revenues per hectare per annum, but that anomaly is another story). It goes further than that. Radiata pine grown on a minimal tending regime producing timber of low to average quality generates a higher rate of return than pruned and thinned radiata pine which produces high quality “clearwood” logs (free of knots) and which can also return higher revenues per hectare per annum than the minimal tending regime. However minimal tending becomes the rule throughout the country and a single product class tailored to a single market becomes the dominant commodity. That has consequences for the domestic processing industry. New Zealand used to have many hundreds of small sawmills which profitably processed high quality sawlogs, both native and exotic, but cannot effectively compete in processing low quality logs. The industry switch to low quality logs put these mills out of business, leaving only a handful of large integrated saw and pulp mills still working in New Zealand. These integrated mills are themselves now closing down, due to New Zealand’s energy shortage which is itself a result of investors chasing the highest possible rate of return on capital. Forestry is foreign owned and produces low quality logs for export to processors in China, Japan, Korea and India among others.

The dairy industry has been through a similar process of capital concentration. Over wide areas of the country the return to capital from dairy farming has been higher than the return from sheep and beef cattle farming or cropping. Therefore dairy has become dominant in the landscape over much of the country. At the same time scores of small dairy factories have closed, to be replaced by mega-factories primarily producing milk powder for export, because milk powder production appears to provide a higher rate of return on capital than butter or cheese production. For both dairy and forestry the ostensibly most profitable course is production of a single relatively low value commodity for export. The advocates of pure market economic theory have no problem with that. However they cannot deny the consequences, which are that there is a loss of production (GDP), a loss of employment, and an increased level of risk to an economy that has placed “all its eggs in one basket”. Those risks can be categorized as market risks (falling demand), reputational risks (such as those posed by the Sanlu scandal, the Fonterra botulism scare, or concerns over sustainability or environmental pollution) and adverse natural events (drought, floods, storms and disease). As the scope of production narrows through specialization, the impact of such adverse events increases. Specialization and the risks inherent in specialization are normal economic phenomena which tend to even out within a wide and diverse economy, because when one specialty strikes trouble, other kinds of production can take up the slack and governments can also intervene to assist that process. But New Zealand’s energy crisis has shown that the particular doctrines and the institutional model of the New Zealand state preclude it from intervening constructively in such situations. “Hard landings” have become the rule for the likes of the timber industry, and they could also affect the energy intensive milk powder industry. For practical reasons, milk powder processing cannot be done off shore, and any added costs of production will have to be borne by the milk producers themselves, the very farmers who have just voted to sell off domestic butter and cheese production.

The second folly of Fonterra was to dispense with the security (risk management) and intelligence advantages of a vertically and/or horizontally integrated business. It is strange that farmers who generations ago felt the need to have some control over the market for their produce and some involvement in the processing of their product should now be oblivious to such considerations. Why, then, stop at divesting the Mainland Group? Why not also sell off Fonterra itself? The honest answer would be that Fonterra’s farmer shareholders know very well that if they did not own Fonterra, they would be at the mercy of a monopsonist raw milk processor. What they fail to appreciate is that having no control over the further processing of their milk will leave them at the mercy of companies like Lactalis. They may not see that risk because they believe that the global market for dairy products truly is a free and competitive market beyond the control of any large player or cartel. Even if that may be the case currently, there is no guarantee that it will remain the case, and even by their own action they have now marginally reduced competition in the global market place. Fonterra’s farmers have shown the same touching faith in the benevolence of the global market as successive New Zealand governments who never imagined the possibility of a Donald Trump. The Mainland Group was not huge relative to Fonterra as a whole. Therefore it would have made sense to retain it as a foot in the door of the “consumer products” markets, and to get practical insight into those markets.

The third folly of Fonterra is a short term perspective, which is a recognised characteristic of under-capitalized colonialist economies which rely first on the unsustainable extraction of natural wealth (whaling, sealing, gold mining, native forest logging) and then seek out other ways to acquire wealth from minimal capital investment, such as pastoral farming and short rotation forestry. (Short term thinking has psychological links to the obsessive regard to rate of return on capital noted above). When the Fonterra supply deals with Lactalis expire, in three and ten years time, Lactalis will be free to use European and other suppliers to meet its base load demand for raw ingredients, letting Fonterra top up supply in times of high demand, and thus leaving Fonterra vulnerable to swings in the market. The forest industry copes with volatile markets because trees can be left in the ground to keep on growing when the demand from Asia drops, but the cows have to be milked every morning, and the going price taken, regardless of what is happening in the global marketplace.

The fourth folly is failing to see beyond one’s immediate business interests. Dairy farmers indirectly benefit from processing in New Zealand. Their sons, daughters, partners and siblings work in the cheese and dairy factories, and those factories also provide the tax revenue upon which modern farms depend for transport and communication networks, bio-security, education, research, health services and so on. My guess is that the agreement with Lactalis, while committing Lactalis to use Fonterra ingredients for ten years would not specify where the processing would be done. If that is the case factories in New Zealand could be closing in less than a decade from now and production could progressively shift to Australia or elsewhere. That would have repercussions not just for Lactalis New Zealand employees but for Fonterra’s own remaining milk powder production (which cannot shift to Australia). Modern industries rely on many specialist engineering services that demand economy of scale, which is one reason why the closure of the Marsden Point oil refinery negatively impacted the New Zealand dairy industry. Every industry that closes makes it harder for those remaining to survive. There comes a tipping point beyond which it is impossible to sustain a modern industrial economy, and New Zealand is moving ever closer to that point.

Let’s go back to the theory that “when one specialty strikes trouble, other kinds of production can take up the slack and governments can intervene to assist that process”. That is, if cheese and butter production is shut down, or the raw milk industry runs into trouble, the inputs to those industries (especially land and labour) will be re-assigned to the production of other commodities. As I pointed out above, that is all very well when one has an economy more diverse than New Zealand’s. Well, the global economy is diverse, is it not? If demand for milk powder falls over, won’t something take its place? Of course it will, and the global economy will take it all in its stride. But here is the catch: in the global economy, the nation of New Zealand is just like a single business or a single working family, and if it is hit hard, there is no global government ready to step in and ease our pain. We will be on our own. Dairy farmers and all. There will be little sympathy and no help from the centres of global capital. It is not a prospect that should be viewed in a cavalier fashion.

If New Zealand continues in the course set by the forest and dairy industries it cannot survive even as a nominally independent state. The end result of domestic disinvestment on this scale must be the abandonment of political sovereignty. The New Zealand state already declares itself to be incapable of playing an active role in the economy. It has explicitly declared that is a task that can only be undertaken by foreign capital. When as a consequence of its economic policies it declares itself unable to manage New Zealand’s social problems, a point we may have already reached, then it will have no option but to rely on foreign states to take on the job of government. After a historically brief period from 1947 to 1984, during which the New Zealand state inclined towards independence, we are now seeing the rapid recolonization of the New Zealand economy and state. New Zealand’s political independence is evaporating as its productive capacity is destroyed.

We should not be heaping blame on Fonterra’s farmers. The nation (more correctly the colonialist political establishment) is to blame for perpetrating the false and simplistic economic doctrines of successive New Zealand governments and by establishing an overpaid and generally incompetent managerial class (of which the colonialist politicians themselves are a formally recognized component) to implement those doctrines. Politicians have purchased a fallacy and sold it to the public. Managers have then applied it, and voters have permitted it to triumph over common sense.

The sale of Mainland Group would suit Fonterra’s senior managers. Producing a narrow range of bulk commodities which are then put out to auction on the global market is easier than all the work that goes into innovating, producing and marketing a diverse range of consumer goods. Selling Mainland will make the lives of Fonterra’s top echelon simpler, and their salaries will increase accordingly, just as the sale of state assets made the lives of politicians easier and their roles more lucrative. Professional managers understand where their own interests lie, and they are skilled at finding the arguments to persuade other stake holders that the interests of the business will also be served by changes that suit the self-interests of managers.

Just last week I successfully concluded a legal case against a farmer rural supplies cooperative. It gave me no pleasure to do so. The very highly remunerated management of the cooperative had made decisions which were contrary to the interests of the members and which violated New Zealand law. The directors had been bamboozled by the managers and the shareholding members (many of whom could also be Fonterra shareholders) were left in profound ignorance. The same probably holds true in Fonterra, and it is certainly true of the body politic. Awakening will only come as a result of a shock to the system greater than anything that can be administered by a court of law.

Winston Peters, who is an utterly unprincipled but never-the-less perceptive politician, described the Fonterra sale as a “sugar hit”. That is true not just for the Fonterra farmers and managers who will use the payment extend their farms, upgrade technology, pay off debt, buy a new car or take the spouse on a cruise . It is also the case for government. The $4.2 billion purchase price will help to shore up the New Zealand dollar and provide a small boost to GDP, but these benefits will be small and fleeting. It can only make sense to a government which is resigned to the loss of economic and political sovereignty.