“Our review will look at whether the regulations are helping or hindering the efficient operation of the New Zealand dairy industry. To do this we intend to examine how competition has developed since Fonterra was established and what it might look like in the future,” commissioner Stephen Gale said in a statement.
The commission was calling for submissions on its discussion document by July 10 and market participants would get another chance for feedback when the regulator released its draft report in November.
Fonterra’s chief executive Theo Spierings this week vowed not to let the co-operative’s share of milk fall further, despite increased competition for supply.
While small rivals have managed to source milk they don’t yet offer a viable alternative for most of Fonterra’s farmers because they haven’t capacity to buy much more milk.
Companies such as Open Country Dairy reportedly have waiting lists of farmers wanting to switch.
Spierings planned to slash hundreds of head office and support jobs, putting more resources into frontline sales amid widespread criticism over Fonterra’s management performance at a time when global dairy prices and farmer payouts had plummeted.
Under the terms of the review, the regulator must report to the Minister for Primary Industries on the state of competition in the dairy industry “and, if the state of competition is insufficient, advise the minister as to whether the market-share thresholds should be reset and provide options for a pathway to deregulation (if any).”
Key tests were contestability in the market for farmers’ milk and access by independent processors to raw milk and other dairy goods and services that were necessary for them to compete in dairy markets.
Contestability in the farmgate milk market and independent processors’ ability to obtain raw milk directly from farmers are promoted by the DIRA’s requirement that Fonterra operate an open entry and exit regime, the commission said.
The DIRA Raw Milk Regulations further required Fonterra to supply independent processors with up to 50 million litres of raw milk for each independent processor, capped at a total of 795m litres a season of the raw milk it collects.
The act also promoted the setting of a base milk price that provides an incentive to Fonterra to operate efficiently, while providing for contestability in the market for the purchase of raw milk from farmers.
The commission annually reviewed Fonterra’s Milk Price Manual and its base milk price calculation.
Units in the Fonterra Shareholders’ Fund, which gives investors exposure to Fonterra's dividends, fell 0.2% to $4.68, and have dropped 22% this year.
