Auction set up to influence milk price

Parliament has passed legislation setting up an auction process for determining the price at which Fonterra must sell raw milk to rivals but rival Open Country Dairy says this will weaken industry competition.

A bill amending the Dairy Industry Restructuring Act (DIRA) - which requires Fonterra to supply a set amount of raw milk to rival start-up processors and manufacturers at a regulated price - was passed as Parliament sat under urgency on Wednesday night.

In its current form the DIRA is intended to encourage competition and mitigate some of Fonterra's market power.

Businesses receiving milk under the arrangement have included Open Country, Tatua, and Graeme Hart's NZ Dairy Foods. But the legislation means that rather than a regulated price, an annual Government designed and operated auction will establish a margin over and above a "farm gate" price for milk.

Federated Farmers Dairy chairman Lachlan McKenzie said Fonterra members had been unhappy that the previous pricing structure effectively meant they were subsidising the operations of rival companies and consumers.

"This bill is about redressing and trying to find a pricing mechanism that would be fair and equitable."

McKenzie said that as it stood, the DIRA had the effect of applying "overzealous" control over the price of milk supplied by Fonterra, weakening it "to the detriment of NZ Inc".

Open Country Dairy chairman Laurie Margraine said his company was not particularly dependent on milk supplied via the DIRA arrangement as it now had its own suppliers.

Nevertheless, his company had concerns that the arrangement, which had helped encourage modest competition in the sector was being undermined.

"We say that competition encourages productivity, encourages efficiency gains ... and we think competition has made Fonterra a better player. It's also required us to be very good as number two."

Labour Rural Affairs spokesman Damien O'Connor said his party would support the bill and the proposed auction process was "something that most people agree is the fairest way of doing it".

But it was "a particularly sensitive piece of legislation given the unknowns around the rest of the changes that may be implemented for the dairy industry". He was referring to possible trading in Fonterra shares and "offshore interest we're beginning to see in the dairy industry".