Raw milk regs costing Fonterra and NZ

Posted by Nicole Eckersley on 18th November 2010

milking cowRegulations in New Zealand, requiring Fonterra to supply up to 600 million litres of milk annually to independent processors, are costing the NZ economy up to $450 million by driving down farmgate prices, according to a report by the New Zealand Institute of Economic Research (NZIER).

Fonterra accepted the obligation to provide raw milk to start-ups, small niche processors and processors supplying the New Zealand consumer market without their own milk supply. However, wide eligibility criteria mean the milk isn’t always going to the small New Zealand businesses it was intended for.

“Much of the milk supplied now goes to larger processors who have their own local milk supply,” said Fonterra Chief Executive Andrew Ferrier.

“These processors are increasingly foreign-owned and are competing with Fonterra in overseas markets. Much of the milk taken is being used to produce commodity milk powder or bulk cheese for export without any appreciable benefit to New Zealand.”

“The NZIER report estimated that if access by established independent processors with their own milk supply was removed, the cost to New Zealand would reduce substantially – down to between $20 million and $50 million,” Ferrier said.

The report, commissioned by Fonterra, forms part of Fonterra’s submissions on the Dairy Industry Restructuring (New Sunset Provisions) Amendment Bill, which is currently before Parliament’s Primary Production Select Committee.

Under the Raw Milk Regulations Fonterra is required to supply up to 600 million litres of milk a year overall to independent processors.

The report found the regulations were now impeding competition in the farm gate raw milk market. In addition, losses of economies of scale were resulting in very significant costs to the New Zealand economy as a whole.

These costs were estimated at between $150 million and $450 million, depending on the assumptions made.

Fonterra’s submission notes that a report for the Ministry of Agriculture and Forestry by NERA Economic Consulting found access to regulated milk by established processors is likely to weaken the incentive for processors to compete for milk from farmers, as a certain volume can be obtained directly from Fonterra.

The bill before the Primary Production Committee extends the application of the Raw Milk Regulations.

The Government has undertaken to conduct a separate review of eligibility to access raw milk, to take place in March next year.

“Fonterra has welcomed this review and it is Fonterra’s strong view that independent processors with their own established supply should be excluded from access to raw milk under the regulations,” Ferrier said.