The Commerce Commission recommends that current DIRA rules are maintained for a further five years or until Fonterra's farmgate market share drops below 30% in either the North or South Island, at which time a further review would be undertaken. Sue Begg, Commerce Commission deputy chair said the costs and benefits of removing competition are of a similar magnitude but she warns there would be disruption to the market if the regulations were removed immediately.
The Commission suggests that the Ministry of Primary Industries (MPI) carries out a staged approach to encourage development of the factory gate market. "We recommend Ministers consider options that facilitate development of the factory gate market," stated Begg.
The Commerce Commission is mainly concerned about limited competition in the factory gate market as their analysis shows competition has developed at the farmgate level. "We do not have an issue at the farmgate market as we do not think Fonterra would disadvantage its suppliers by lowering the milk price," reported Begg.
The Commerce Commission review of the state of competition in NZ's dairy markets was triggered by Fonterra's milk intakes in the South Island dropping below the 20% threshold. The review involved both the Commission's competition and regulation teams and released draft report.
Source: Commerce Commission
There are concerns that without any regulations the farm gate milk price could be depressed. The farm gate market is still highly concentrated and there are significant barriers to entry to these markets. However the Commission does say that removing regulations would not have a big impact on the farm gate market. The Commission concludes that Fonterra would still have significant market power, but little or no incentive to use it to the detriment of its shareholder farmers due to its co-operative nature.
Removing regulations is however likely to increase the prices of previously regulated DIRA milk due to a lack of competition in the factory gate market. This could have flow-on implications for the retail price of fresh milk, cheese and yoghurt.
The factory gate market refers to the wholesale market where dairy processors trade raw milk. This includes both milk that must be supplied under DIRA legislation, referred to as 'DIRA milk' and non-DIRA milk i.e milk that is traded but is not regulated. The Commission concludes that non-DIRA milk trades at a significantly higher price than DIRA milk. It says if the industry was deregulated then the price of the milk that currently trades under the DIRA regulations would increase.
The Commission does note that there are costs to the industry, or rather Fonterra, in maintaining excess capacity. Processors who purchase DIRA milk from Fonterra have some flexibility regarding timing of deliveries, and therefore Fonterra must maintain sufficient processing capacity to process the DIRA milk should other processors not purchase this milk.
Click here to download the draft report
