Media Releases

Commission releases draft report on dairy sector competition in NZ

6 November 2015

The Commerce Commission has today released its draft report for consultation on the state of competition in New Zealand’s dairy industry.

The Commission began its review in June this year at the request of the Minister for Primary Industries as required under the Dairy Industry Restructuring Act 2001 (DIRA).

Deputy Chair Sue Begg said the Commission’s draft finding is that, on balance, there is not sufficient competition at the farm gate and factory gate to consider full deregulation at this time.

“Our primary concern is that competition in the factory gate is very limited. Without the existing regulations, Fonterra would be able to increase the price of raw milk it sells to other domestic processors. This could in turn result in higher retail prices for dairy products in New Zealand,” Ms Begg said.

“While there are signs of competition and growth in the farm gate market, particularly in Canterbury, Southland and Waikato, Fonterra faces little competition as the dominant buyer of raw milk in most regional markets. However, it does not have the ability or incentive to reduce prices to farmers in this market due its co-operative nature and constraints from competitors.”

The Commission also concluded that Fonterra has limited ability and incentive overall to shut competitors out of dairy markets if the regulations were removed.

The Commission’s draft report has outlined options for transitioning to deregulation in the future and resetting the current market share thresholds that prompt a competition review. The recommendations include:

  • taking a staged approach to amending the DIRA regulatory regime, beginning with a review of the Raw Milk Regulations with an eye to allowing a factory gate market to develop
  • resetting the market share thresholds in both the North and South islands to 30 percent (up from the current 20 percent) as the trigger for a competition review of the dairy industry.

“Our analysis suggests that gradual relaxation of the Raw Milk Regulations may encourage the factory gate market to develop. Full deregulation currently poses a potential risk to domestic competition in goods such as fresh milk and cheese, where independent processors are dependent on regulated access to raw milk from Fonterra. Taking a staged approach to deregulation would mitigate this risk,” Ms Begg said.

“We recognise that any changes to the regime would need to be carefully managed and welcome submissions from interested parties. In particular we want to test the evidence on the likely costs and benefits of deregulation and whether our recommended approach of developing a more competitive factory gate market is appropriate at this time.”

Read the draft report.

Submissions close at 5pm on Monday 4 December, with cross-submissions to be received by 5pm Friday 18 December.

Background

Why is the Commission undertaking this review?

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 Minister of Primary Industries requested the review in June 2015 and requires the Commission to complete its final report by 1 March 2016.

What is the purpose of the review?

The DIRA regulatory regime is transitional in nature and designed to expire if and when the New Zealand dairy markets are considered to be sufficiently competitive, so that industry-specific regulation is no longer required over and above the normal application of general competition law.

The Commission 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).

What are the farm and factory gate markets?

The farm gate market is where processors of raw milk including Fonterra compete to acquire raw milk from farmers.

The factory gate market is where processors supply raw milk to each other (primarily when they do not collect it direct from farmers themselves). For example, cheese, fresh milk or yoghurt producers routinely purchase raw milk from Fonterra.

What are the market share thresholds?

When the Minister is satisfied that independent processors collect 20 percent or more of all milk solids in a season in either island, this would trigger a competition review of the dairy industry in that island. The Minister would then consider whether the market share threshold should be reset or alternative regulation adopted. The 20 percent threshold was met in the South Island in the 2014/15 dairy season.

The Commission’s draft recommendation is that the threshold should be increased to 30 percent for both islands.

How do the current regulations allow for contestability in the market?

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 through an open entry and exit regime; and
  • access by independent processors to raw milk and other dairy goods and services that are necessary for them to compete in dairy markets.

How do the Raw Milk Regulations support independent processors?

The DIRA Raw Milk Regulations 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.

How does this draft report compare with the 2011 inquiry into domestic milk markets?

In relation to the wholesale and retail dairy markets, we found no new information that would alter the conclusions reached in our preliminary inquiry into whether the Commission should initiate an inquiry under Part 4 of the Commerce Act 1986 into domestic milk markets in 2011.

What has been the process for this review?

The Commission released a consultation paper on 12 June 2015 outlining its proposed approach, timeframes and the scope of the review. Submissions closed in July. Interviews have been held with a number of market participants, including Fonterra and independent processors, and a significant amount of further information was sought and received from across the industry.

The draft report is now out for consultation, with submissions and cross-submissions to be completed by 18 December.

The final report will be provided to the Minister for Primary Industries no later than 1 March 2016 and released to the public.