NZ regulator begins review into dairy competition since Fonterra's foundation

The review is required under the DIRA Act 2001(Dairy Industry Restructuring Act), when Fonterra was established. It sets out the rules for supply to other milk companies and anticipates those DIRA provisions being phased out once certain market share thresholds have been met.

Commissioner Stephen Gale said “the review will look at whether the regulations are helping or hindering the efficient operation of the NZ dairy industry. To do this we intend to examine how competition has developed since Fonterra was established and what it might look like in the future.”

The Commission is calling for submissions on its discussion document by 10 July and market participants will get another chance for feedback when the regulator releases its draft report in November.

Theo Spierings, Fonterra’s CEO, vowed this week not to let the co-op’s share of milk fall further, despite increased competition for supply.

While small rivals have managed to source milk, they don’t yet offer a viable alternative for most of Fonterra’s farmers because they don’t have the capacity to buy much more milk.

Companies such as Open Country Dairy reportedly have waiting lists of farmers wanting to switch.

Fonterra shareholder farmers have to increase their shareholding when they increase milk supply but there is no requirement for shareholding in the private companies.

Spierings plans to slash hundreds of head office and support jobs, putting more resources into frontline sales amid widespread criticism over Fonterra’s management performance when global dairy prices and farmer payout milk price have plummeted.

Under the terms of the review, the regulator must report to the Minister for Primary Industries on the state of competition in the industry and “if the state of competition is insufficient, advise the minister as to whether the market share threshold should be reset and provide options for a pathway to deregulation if any.”

The key tests are contestability in the market for farmer’s milk and other dairy goods and services that are necessary for them to compete in dairy markets.

The Commission said, "contestability in the farm gate milk market, and independent processors ability to obtain raw milk directly from farmers, are promoted by DIRA’s requirement that Fonterra operate an open entry and exit regime. The DIRA Raw Milk Regulations further require Fonterra to supply independent processors with up to 50 million litres of raw milk per independent processor, capped at a total of 795 million litres of the raw milk it collects each season."

The Act promotes the setting of a base that provides an incentive to Fonterra to operate efficiently, while providing for contestability in the market for the purchase of raw milk from farmers. The Commission annually reviews Fonterra’s milk price manual and its base milk price calculations.

Units in the Fonterra Shareholders’ Fund which gives investors exposure to Fonterra’s dividend, fell 0.2% to NZ $4.68 after dropping a total of 22% this year.