At a briefing in Wellington on Tuesday morning, deputy chair Sue Begg outlined the Commission’s view that Fonterra would have substantial market power in both markets should there be full deregulation and believes competition at the factory gate market is not yet sufficiently developed.
The commission’s assessment followed a review of the state of competition in the industry, and a request by the Minister for Primary Industries for advice on whether the market share thresholds in DIRA (Dairy Industry Restructuring Act) should be reset.
The risks of full deregulation would likely be felt by New Zealand domestic consumers of dairy products, where Fonterra would be able to increase the price of raw milk it sells to processors. The increase in costs taken on by processors would then be passed on to consumers, though an increase in the retail price of milk, yoghurt and cheese, and a reduction in variety and quality of dairy products.
The commission believes the DIRA has reduced barriers to entry,constrained Fonterra’s market power and enabled the development of some competition. However Begg noted competition was irregular and regionally variable. “In Northland Fonterra has only a little less than 100% of the market. In Canterbury and Southland there has been a reasonable increase.”
Instead of full deregulation, the commission has recommended a staged deregulation that would reduce transition costs and provide options to reduce that risk.
The need to create a factory gate market would be a priority as ministers looked at deregulation options. In order to facilitate this, the commission proposed reducing independent processor entitlements, tightening conditions for supply of regulated milk, retaining open entry and existing provisions for farmers during a transitionary period.
The commission did however propose one qualification. Begg said “we consider removing open entry requirement provisions for new conversions since these don’t assist competition and impose costs on Fonterra. If Fonterra does take milk [from new conversions] they could lock them in to long-term supply”.
The commission recommended resetting the market threshold to 30% (up from 20%), and resetting the time limit thresholds to trigger a future report on the state of competition to five years.
The Minister for Primary Industries was now required to respond to the recommendations within 90 days.
