Media Releases

Commission opens consultation on dairy competition review

12 June 2015

The Commerce Commission today released a consultation paper outlining its proposed approach, timeframes and scope for its review of the state of competition in the New Zealand dairy industry.

Commissioner Dr Stephen Gale said the Commission was now seeking submissions on its proposed approach.

“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,” Dr Gale said.

The Commission has provided for two consultation periods during the review. Submissions on the consultation paper are due by 10 July. The Commission will also conduct interviews with and request information from market participants during that period. The second opportunity for interested parties to provide feedback will be after the draft report is published in November.

“We are working to a tight timeframe and are asking submitters to raise all potential issues upfront to ensure we have the maximum time available to explore them before publishing our draft report,” Dr Gale said.

The consultation paper and terms of reference are available on the project page.

The Minister of Primary Industries requires the Commission to complete its report by 1 March 2016.

Background

The Dairy Industry Restructuring Act 2001 (DIRA) requires the Minister of Primary Industries, in consultation with the Minister of Commerce, to request a report on the state of competition in the New Zealand dairy industry:

  • when the DIRA market share thresholds in section 147 are met, or
  • in the event that they have not been met by 1 June 2015, as soon as practicable after that date.

The report must provide an assessment of 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).

Section 148(3) of the DIRA requires the Minister to give notice within 90 days of receiving the report, of whether he intends to promote legislation that resets either or both of the market share thresholds specified in section 147 or to promote the adoption of measures that provide a transition pathway to deregulation, or to promote both.

These requirements were put in place because the regulatory regime under the DIRA was designed to be transitional in nature. It was intended to expire if and when the New Zealand dairy markets are sufficiently competitive.

The Act also contains provisions that have the purpose of advancing the efficient operation of New Zealand dairy markets by promoting:

  • contestability in the market for farmers milk; and
  • access by independent processors to raw milk and other dairy goods and services that are necessary for them to compete in dairy markets.

Contestability in the farm gate 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 DIRA Raw Milk Regulations further require Fonterra to supply independent processors with up to 50 million litres of raw milk per independent processor, capped at a total of 795 million litres per season of the raw milk it collects. This provides a stepping stone for new processors and an ongoing source of supply for niche producers.

The Act also promotes 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 reviews Fonterra’s Milk Price Manual and its base milk price calculation.