Commerce Commission report
• Not enough competition at the farm gate to ensure full deregulation of dairy
• Recommends development of a "factory gate" market for milk
• Ups market share thresholds to 30 per cent in both North and South Island for Fonterra's competitors (from 20 per cent).
The Commerce Commission has announced there not enough competition at the farm gate to consider full deregulation of New Zealand's dairy industry.
As it stands, Fonterra operates under near monopoly conditions but is obliged, under the Dairy Industry Restructuring Act 2001 (DIRA), to supply milk to its competitors.
The commission's review began in June last year at the request of the Minister for Primary Industries, Nathan Guy, as is required under the act.
"Having considered submissions on the draft report released in November, the Commission's view remains that there is not sufficient competition at the farm gate and factory gate to consider full deregulation at this time," the commission said in a statement.
Deputy chair Sue Begg said that while the costs and benefits of the DIRA regulation were "more or less balanced", the risks of removing it too soon outweighed the risks of it remaining longer than it should.
"As it stands, without regulation Fonterra would be able to increase the price of raw milk it sells to other domestic processors and this would likely flow through to higher retail prices of dairy products for New Zealand consumers," she said.
"Increased competition is needed, particularly at the factory gate, and our view is it is better to err on the side of caution before embarking on full deregulation," Begg said.
The final report recommends that a pathway to deregulation would be "smoothed" by facilitating the development of a factory gate market for non-DIRA milk.
The report also confirms the recommendation to reset the market share thresholds in both the North and South Islands to 30 percent, (up from the current 20 percent, as well as resetting the time limit threshold to the 2021/22 season as the triggers for the next competition review of the dairy industry.
DIRA regulation has reduced barriers to entry and constrained Fonterra's market power, it said.
Some competition has developed in the farm gate market and little competition has developed in factory gate market, the commission said.
The farm gate market is where processors of raw milk including Fonterra compete to acquire raw milk from farmers. The factory gate market is where processors supply raw milk to each other - primarily when they do not collect it direct from farmers themselves.
DIRA regulations 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, providing a stepping stone for new processors and an ongoing source of supply for niche producers. Under the regulation, Guy has 90 days to respond to the report's recommendations.