The Ministry for Primary Industries public discussion report on the Dairy Industry Restructuring Act said the automatic expiry provisions were repealed by the Labour-New Zealand First Government in February.
The repeal was because DIRA was due to expire in the South Island, where Fonterra had fallen below 80% market share, and to facilitate the MPI review in a stable regulatory environment.
Fonterra has taken issue with that, saying that uncertainty over DIRA and continued dairy market regulation are adding risk in the dairy industry.
MPI said Fonterra’s market share has fallen from 96% in 2001 to 80.5% in 2018.
“Our preliminary analysis of regulatory precedent and economic literature suggests that at a market share of over 70% a firm could have the ability to exercise market power, especially if competition was relatively weak and barriers to entry were material.”
There is at least one independent processor in all regions except Northland and Wairarapa.
The question was whether Fonterra, in the absence of the DIRA, would have the ability and incentive to create barriers to farmers switching to other processors, MPI said.
“Our preliminary view is that, in the absence of the DIRA, the barriers to entry and expansion by independent processors could become significant.”
MPI cited falling cow numbers, reduced availability of land for conversion and environmental constraints stemming from water quality objectives, controls on land use intensification and the likely inclusion of agriculture in the Emissions Trading Scheme.
Fonterra and other processors have strong incentives to retain their suppliers and avoid asset stranding and plant closures.
“Fonterra, given its size, may have the ability to do so to an extent that could be detrimental for the entire dairy industry and the wider economy.”
MPI said industry stakeholders believe DIRA is still relevant and needed.
Fonterra said the 2001 DIRA had included automatic repeal provisions when its market share shrank to 80%.
In the report MPI listed four options on this matter:
Status quo; with no provision for expiry;
Retain DIRA with periodic reviews of competition in the dairy industry (say five years);
Retain DIRA with a review when a set market share threshold has been reached or;
Retain DIRA with automatic expiry when a set date or market share has been reached, say 70%.
MPI favours the second option, saying the risk of the DIRA being repealed too early and the risk of it applying for longer than necessary could be relatively balanced.
The industry would know a time period during which regulatory change would be unlikely to take place.
But it might face some uncertainty and instability from repeated reviews.
