ComCom says not enough competition in dairy to warrant full deregulation

Friday 6th November 2015

The Commerce Commission doesn't see enough competition in the dairy sector to consider full deregulation, particularly at the processing level, which may benefit from a gradual loosening of the rules.

The regulator's draft report on dairy sector competition recommends a staged approach to amending the Dairy Industry Restructuring Act, beginning with a review of raw milk regulations to help the processing competition to develop, and raising the thresholds in the North and South islands to 30 percent market share to trigger a review of the sector. Last season, independent processors collected 22 percent of all milk solids in the South Island and 9 percent in the North Island, triggering the expiry of the provisions in the South Island by no later than May 31, 2018.

The commission was tasked with investigating whether Fonterra Cooperative Group's 86 percent share of the local market gives it too much dominance as part of the legislation governing the sector.

"Our primary concern is that competition in the factory gate is very limited," deputy chair Sue Begg said in a statement. "Without the existing regulations, Fonterra would be able to increase the price of raw milk it sells to other domestic processors. This could in turn result in higher retail process for dairy products in New Zealand."

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

The commission's draft analysis suggested a gradual relaxation of raw milk regulations could stoke development in the factory gate, mitigate the impact of some processors relying on Fonterra to source their raw material. 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 per season of the raw milk it collects.

"We recognise that any changes to the regime would need to be carefully managed and welcome submissions from interested parties," Begg said. "In particular, we want to test the evidence on the likely costs and benefits from deregulation and whether our recommended approach of developing a more competitive factory gate market is appropriate at this time."

The draft report said Fonterra doesn't have the ability or incentive to exercise market power by cutting prices below competitive levels at the farm gate, as it would be unlikely to act against its shareholder suppliers, and wasn't able to prevent of hinder rival processors from accessing raw milk due to the DIRA regulations and constraints from competitors.

Begg told a briefing in Wellington the regulations have been successful in "making it easier" for independent processors to source product and in reducing Fonterra's influence, though there were costs associated for Fonterra in maintaining excess capacity. She said there wasn't any evidence the regulations were driving inefficient dairy conversions.

"The key changes that need to happen are in the factory gate market," she said. The regulator wants a staged approach to deregulation because "we don't want the market to be disrupted - it takes time."

The report said effective competition was emerging in Canterbury, Southland, Taranaki and Waikato, while there was little or no competition in Northland, Wairarapa and the Hawke's Bay, but wasn't sufficient in limiting Fonterra's ability to exercise market power.

Still, Begg said the regulator was encouraged by that developing competition at the farmgate and that Fonterra's cooperative structure and constraints provided by new entrants, which limited their concerns at the farmgate.

Submissions on the draft report close on Dec. 4, with cross-submissions due on Dec. 18. The final report is due to the minister on Feb. 29.

BusinessDesk.co.nz

Comments from our readers

No comments yet