The co-operative’s arguments come in a submission to the Commerce Commission which is reviewing the state of competition in the New Zealand dairy industry. If the conclusion is that there is enough competition in the farmgate and factory gate markets, the Government could decide to deregulate the industry.
Currently Fonterra, which reveals its share of the farm gate milk market has fallen to 85 per cent, is required under the Dairy Industry Restructuring Act (DIRA) to accept all milk.
DIRA was passed in 2001 as a competition control tool for Fonterra – created that year from an industry mega-merger – which at the time had 96 per cent of the raw milk market.
Fonterra’s submission said it supports a staged removal of aspects of DIRA.
Fonterra believed the DIRA measures which addressed Fonterra’s size had played their part but there had been significant changes in the industry, with more than 70 per cent of Fonterra milk now collected in areas where there were competitors for farmers’ milk.
Fonterra said the requirement for it to take all milk no longer provided efficiency benefits over and above the existing market dynamics and left Fonterra as the «fallback option» for all potential suppliers.
«They effectively have a free option to take risks with another processor with the costs of this being carried by Fonterra and its farmer shareholders. It means Fonterra must live with additional uncertainty about the volume and location of future milk.
«Fonterra needs to build capacity for milk that may or may not arrive and which may or may not stay with Fonterra long-term.»
The submission said Fonterra should no longer have to supply milk to larger processors, but it accepted the requirement to supply Goodman Fielder remained important for public confidence in wholesale and retail markets. It also recognised there was still a case for small, niche processors without their own milk supply having access to Fonterra milk – «even though it is confident satisfactory commercial arrangements could be agreed without the Raw Milk Regulations». The regulations were made in association with DIRA.
The Commerce Commission review this year is a requirement of DIRA. The commission, New Zealand’s competition watchdog, has until April to report to the Minister for Primary Industries.
If the commission concludes there is not enough competition, its report will provide recommendations on whether the market share thresholds in DIRA should be reset, what the options are for a transition pathway to deregulation, and if any of those options should be pursued.
Source: Stuff
