NZ competition watchdog decides there is nothing wrong with milk prices

Posted by AFN Staff Writers on 4th August 2011

New Zealand’s Commerce Commission has decided not to hold an inquiry into milk prices after arguing that there is enough competition at retail and wholesale level in the market.

Dairy giant Fonterra, formed in 2001 to help promote New Zealand’s dairy exports, collects over 90 per cent of the country’s milk production and sets national prices.

The Commission reviewed the way prices were set in New Zealand’s milk sector after complaints that retail prices were too high and wholesale prices were too low. The competition watchdog had also heard that farm-gate milk prices were too high, which made it difficult for independent processors to compete.

The review looked at the farm-gate supply of milk, which is the market for the supply of raw milk by farmers. It studied the factory-gate supply, where raw milk is supplied to other processors. The Commission also scrutinised the wholesale and retail supply of milk.

The Commission said on 2 August that conditions at the level of farm-gate supply meant there were no grounds for an inquiry. However, it noted that New Zealand’s Ministry for Agriculture and Foresty continued to investigate the way Fonterra to set farm-gate prices.

On factory-gate supply, the Commission said there appears to be “little or no competition in the market” and “little or no likelihood of a substantial increase” in competition. However, it pointed to New Zealand’s regulations governing the supply of raw milk and pointed to a second review from the Ministry for Agriculture and Forestry, this time on the rules on raw milk, which is also ongoing.

In both the wholesale and retail markets, the Commission said there was more competition than the threshold at which it has to recommend price controls are introduced.

“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,” Dr Mark Berry, chair of the Commission, said.

Fonterra welcomed the Commission’s decision and insisted there was “no justification for a price control inquiry or further regulation at any level of the milk market”.

CFO Jonathan Mason said competition in New Zealand’s milk market was “thriving”. He said: “If some processors are not doing as well as Fonterra, that’s because Fonterra makes more from a bucket of milk than them – by doing what it was set up to do. It adds value to New Zealand milk and is performing well, supported by recent world class processing investments and ongoing investments in value-add. As a co-operative owned by Kiwi farmers, all that value flows back into the New Zealand economy.”

Mason also brushed off complaints that Fonterra had driven up retail milk prices, insisting that international factors had an effect. “The facts are that retail prices in New Zealand reflect international dairy prices. All around the world, food prices have gone up,” he said.

However, the two ongoing investigations from the Ministry of Agriculture and Forestry could lead to changes in the way Fonterra’s sets farm-gate prices and the rules on the supply of raw milk.

The NZ Commerce Commission, meanwhile, said it would consider allegations that Fonterra misused its market power by freezing its prices to supermarkets.

Mason said Fonterra had decided in February to absorb the impact of further commodity price increases. “It is ironic that a voluntary price freeze could be viewed as breaching legislation which has the ‘benefit of consumers’ at its core.”

The decision comes a week after Australian consumer watchdog, the Australian Consumer and Competition commission, ruled that Coles’ discounting of house-brand milk does not breach Australian competition law.

This article is sourced, with editorial adaptations, from just-food – the world’s leading portal for the global pre-packaged food and retail industries. Its daily mix of breaking news, views, analysis and research serves over 100,000 food executives each month.