Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
That could encourage the factory gate market to develop, it says.
The commission has released its draft review report for consultation on the state of competition in New Zealand's dairy industry.
Deputy chair Sue Begg says 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 at 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," Begg says.
"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:
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- 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% (up from the current 20%) 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," says Begg.
"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."
Submissions close at 5pm on Monday, December 4, with cross-submissions to be received by 5pm Friday, December 18.
