Regulator begins review into dairy competition since Fonterra's inception

Friday 12th June 2015

The Commerce Commission has released details of the scope of its inquiry into whether Fonterra Cooperative Group's 87 percent of New Zealand's milk pool gives it too much market dominance.

The review is required under the Dairy Industry Restructuring Act 2001, when Fonterra was established, which sets rules for supply to other milk companies and anticipates those DIRA provisions be phased out once certain market share thresholds have been met.

“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 is calling for submissions on its discussion document by July 10 and market participants will get another chance for feedback when the regulator releases its draft report in November.

Chief executive Theo Spierings this week vowed not to let the cooperative'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 plans to slash hundreds of head office and support jobs, putting more resource into frontline sales amid widespread criticism over Fonterra's management performance at a time when global dairy prices and farmer payouts have 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 are 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 commission said. 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.

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.

Units in the Fonterra Shareholders' Fund, which gives investors exposure to Fonterra's dividends, fell 0.2 percent to $4.68, and have dropped 22 percent this year.

BusinessDesk.co.nz

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