The answer of course is the chicken and egg one of farmer protectionism. Because the industry pays out an unbundled, average price to suppliers as its sole means of profit distribution, farmers naturally seek to maximise the volume of milk. Processing the milk flood then becomes the primary function of the downstream activities - a case of the supplier tail wagging the production dog. The Dairy Board's recent project in Brazil where it doesn't use New Zealand milk at all is a good example of an industry initiative not driven by getting rid of the over-supply from our protected dairy farmers. Unfortunately such initiatives are very much in the minority of the capital investments the industry makes.
Economies of scale is a characteristic a commodity producer seeks in order to be viable.
Foreign owners will take over the industry if we don't maintain the co-operative structure. This is a hoary one farmer politicians love to tub thump around the traps, stirring the xenophobic fears that run deep through the nation's cowsheds. If Farmer Joe wants assured of a trip to the inner sanctum of dairy industry politics then he just needs to scare his mates over foreign ownership and his election is assured. Once there, his tenure might be short - but that's a different story. New arrivals to the Dairy Board are quickly confronted with the untenable economics of the industry imposed by its intractable ownership structure.