ComCom still keen on more deregulation in dairy industry

The Commerce Commission questions whether new dairy conversions should retain automatic rights to supply Fonterra Cooperative Group in its largely unchanged final report on competition in the sector, which recommends a staggered path to further deregulation.

The report on dairy sector competition reaffirms an earlier view that a staged approach to amending the Dairy Industry Restructuring Act, enacted to promote domestic dairy market competition when Fonterra was formed in 2001, is appropriate, beginning with easing raw milk regulations to force independent processors to compete more aggressively for supply.

It recommends a further review should occur when milk collections by independent processors in the North and South Islands reach 30% of market share, from the current 20% threshold, or at the end of the 2021/22 dairy season, whichever comes first.

The report found open entry and exit provisions requiring Fonterra to accept new milk supply helped independent processors access raw milk by reducing the risk to farmer suppliers of leaving Fonterra for one of its competitors. However, the commission is more wary of new dairy conversions enjoying the same protections as they do "little to supporting competition in the farm gate market and potentially impose costs on Fonterra, even though we have not found evidence to suggest that the costs involved are currently material."

Deputy chairwoman Sue Begg told a briefing in Wellington that Fonterra was "particularly concerned about large conversions" where it would have to provide processing capacity able to take the supply without a guarantee of securing it.

"The costs and benefits around that provision might mean it's efficient to remove it," Ms Begg said.

The recommendation on conversions comes as the country's biggest farming operator, Landcorp, reviews a joint venture to convert the 26,000 hectare Wairakei Estate near Taupo, which has been estimated to produce 16 million kilograms of milk solids a year. That's equivalent to about 1% of Fonterra's forecast collection for the current season.

The report said an option would be to give Fonterra discretion to accept or reject new conversions seeking to become cooperative shareholder suppliers while noting that would create issues defining what constitutes a new conversion.

Ms Begg said the commission's main competition concern is around the factory-gate price, which is what processors pay other processors to source product. If the industry were fully deregulated, there were fears Fonterra would increase raw milk prices to processors, which would ultimately be borne by end consumers. It recommends options be considered to develop the factory-gate market to gradually reduce reliance on regulated raw milk.

Primary Industries Minister Nathan Guy now has 90 days to respond to the report's recommendations.

"In summary, the final report has found that competition in the New Zealand dairy industry is not sufficient to warrant full deregulation at this time," said Guy in a statement responding to the report this morning.

(BusinessDesk)