Editorial: Pricing milk

However, the champagne corks won't be popping either at the co-operative head office or on farms around the country.

This is because the Government has rejected Fonterra's pleas to leave the milk price panel alone. Instead, the Government is adding further oversight to how the co-operative sets the milk price for its farmer shareholders.

Under Fonterra's constitution, its farmgate milk price is set by the board using its milk price manual. A milk price appointed by the board supervises the calculation of the milk price and recommends a milk price to the board. Fonterra's milk price is seen as the benchmark for the industry.

Rival milk processors have complained to the Government about the need for a fundamental revision of the milk price manual and say a wider milk price-setting regime is needed.

Open Country Dairy, the country's second largest processor, claims the capital restructure presents a serious threat to competition and to maintaining a level playing field for milk processors.

It points out that it's highly unusual for a regulatory tool that sets prices for a whole market, like the milk price manual, to be held by the dominant firm in that market.

OCD called for a new milk price panel independent of Fonterra.

On the other hand, Fonterra believes that the independence of the panel is already assured through its current composition.

The Government disagrees with Fonterra.

While it has rejected OCD's call for a milk price panel independent of Fonterra, it is increasing the number of ministerial nominees from one to two.

Also, the panel chair is to be fully independent of Fonterra, and appointed only with the approval of the Minister.

The Commerce Commission also gets the power to issue binding directions to Fonterra on matters arising from its reviews of the manual and base milk price calculation.

Fonterra's protest that the changes will add significant additional annual cost for no clear benefit has fallen on deaf ears.

The Government is making it clear that it wants to strike the right balance between supporting Fonterra's shareholder mandate while taking the opportunity to improve transparency in the sector.

Competition for New Zealand milk is only getting stronger. New entrants are coming in every year.

The Government sees new entrants bringing competitive innovation to the industry and they want to see that continue even if Fonterra doesn't fully agree with the Government.