No inquiry into milk prices

No inquiry into milk prices
After reviewing New Zealand's milk markets, the Commerce Commission has concluded there is no basis for an inquiry into the price of milk.

After reviewing New Zealand's milk markets, the Commerce Commission has concluded there is no basis for an inquiry into the price of milk. 

“At the retail level there is competition between the two major supermarket chains, dairies, service stations and other retailers. At the wholesale level, it is the competition between Fonterra Brands and Goodman Fielder that exceeds the little or no competition threshold,” said commission chairman Dr Mark Berry.

“Overall our analysis shows that the level of competition, taking into account existing regulation arrangements means that intervention under Part 4 of the Commerce Act is not possible."

Berry said the threshold for launching an investigation was high and price controls could only be recommended if "little or no competition" existed.

"Part 4 regulation is only imposed on firms with a high degree of market power, usually because of the natural monopoly characteristics of the industry in question, such as electricity or gas distribution."

The regulator said it interviewed 32 participants at the four levels of the domestic milk market:

• Farm gate supply – the regional market for the supply of raw milk by farmers
• Factory gate supply – the markets for the supply of raw milk by processors/collectors to other processors
• Wholesale supply – the markets for the processing and wholesale supply of fresh milk
• Retail supply – the retail supply of milk in supermarkets

It found that there were no grounds to intervene at the farm gate. Legislation provided only for regulation of supply, not acquisition of goods and services where the acquirer has a high degree of market power.

At the factory gate, the commission said there was "little or no competition in the market" and little to no likelihood of an increase in competition. However, factory gate supply was already regulated under the Dairy Industry Restructuring Act and the Raw Milk Regulations, which were designed to constrain Fonterra's market power.

An interdepartmental team consisting of the Ministries of Agriculture and Forestry, Economic Development and the Treasury is currently reviewing the regulations concerning farm gate raw milk prices.

As to the supply step of the chain, the commission said it could not recommend regulation there either as individual farmers lack market power.

View the full report on the Commission’s website.

Federated Farmers dairy chairperson Willy Leferink said the report confirmed what farmers already knew.

“What led to calls for the Commerce Commission to look into milk pricing was milk selling in Australia and the United Kingdom at prices not seen for years," he said.

“When you look at ‘non-milk war’ retail pricing from the United States, Canada, Australia, UK, Ireland and France, New Zealand comes in at the lower end of pricing.  Our milk doesn’t of course come with the hidden whammy of subsidy."

Last month Fonterra commissioned antitrust economics firm Compass Lexecon to evaluate the milk market in New Zealand. Its report concluded the Dairy Industry Restructuring Act had led to increased competition and that the way Fonterra calculates its milk price – based on global prices for commodities, less the costs of a notional competitor – was correct.

It also said domestic dairy prices had not increased as much as global prices, mainly due to to the growth of discount supermarket home brands, which account for about 70 percent of fresh milk sales.

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