Focus turns to secret milk-price formula

The Commerce Commission ruled enough rivalry existed between supermarkets. Photo / APN

Fonterra's secret formula for setting underlying milk prices has become the focus of concerns about high consumer prices after the Commerce Commission ruled out taking action in the retail and wholesale markets.

Labour and the Greens are now pushing for a parliamentary inquiry into milk prices and Act MP Hilary Calvert, who holds the balance of power in the commerce select committee, said she was likely to support such an inquiry.

The Commerce Commission yesterday ruled out price controls, saying enough rivalry existed between the two main supermarket chains in the retail market and between Fonterra and Goodman Fielder in the wholesale market.

However, there was "little or no competition" in the market for supplying milk to processors which is dominated by Fonterra. The commission also said it did not have the authority to look at prices paid to farmers.

Despite the findings Agriculture Minister David Carter said he could not assure New Zealanders they were paying a fair price for milk.

He said that would only become clear once a separate investigation into underlying farm gate and factory gate prices by an interdepartmental group was completed this year.

Since persuading officials three years ago that it was effectively subsidising its rivals, Fonterra has been able to set the farm gate price using a confidential formula. The factory gate price is based on the farm gate price plus 10c per kilogram of milk solids.

Fonterra's rivals argue Fonterra sets the farm gate price higher than it should to stifle competition and to discourage farmers from leaving the co-operative.

Opposition leader Phil Goff said the commission's decision not to investigate further was "hugely disappointing" given families were struggling with the high cost of living.

Labour would push for an inquiry to find out "why the price of milk in New Zealand is so high when we're the country that produces it".

Green Party MP Sue Kedgley said it was "unacceptable [that] a company that has a monopoly on the supply of raw milk to other processors can set the price".

Act's Ms Calvert said there were big questions around Fonterra's market power and farm gate pricing formula and if those issues were to be examined in the committee's proposed inquiry, she would back it.

Consumer NZ chief executive Sue Chetwin believed Fonterra's farm gate and factory gate prices had helped drive consumer prices higher in the last two years but it was impossible to know by how much because, "Fonterra is pretty secretive about how that price is set".

She believed the price should be set by a neutral party.

"There's been some talk about an independent milk commissioner and I think that wouldn't be a bad thing."

Meanwhile, Fonterra welcomed the Commerce Commission's announcement yesterday.

Chief financial officer Jonathan Mason said Fonterra had always believed there was no justification for a price control inquiry or further regulation at any level of the milk market.

He said Fonterra's competitors led the call for an inquiry.

"Those competitors want to force down the amount they pay New Zealand farmers for raw milk," he said.

"The reality is that competition is thriving in the New Zealand dairy market."

Fonterra maintains that the price increases that led to the Commerce Commission investigation were due to rising international prices.