Second milk pricing probe underway

Three Government agencies have established a group to look into how Fonterra sets the prices it pays farmers for their milk. File photo / NZ Herald

A second probe into Fonterra's milk pricing has been launched, with an interdepartmental group spanning three Government agencies looking into the issue.

The Ministry of Agriculture and Forestry (MAF), the Ministry of Economic Development (MED) and Treasury have established a group to look into how the dairy giant sets the prices it pays farmers for their milk.

The move comes after the Commerce Commission this year said it was investigating whether it needed to carry out a full-blown probe of the retail prices charged for milk.

Fonterra said it had been in contact with MAF officials since April.

"We are comfortable with the review process, which will involve input from other government departments, and we are continuing to work with MAF."

Details of the interdepartmental group were outlined in a briefing paper from MAF and MED which was last week submitted to Parliament's commerce select committee, which is considering whether to conduct its own inquiry.

The paper said the group was establishing whether or not there was a problem with milk pricing and, "if there is a problem, how big it is".

Fonterra said the MAF memo to Parliament's commerce committee simply outlines the background to the way Fonterra's farmgate milk price is determined and the process being undertaken by MAF for its previously-announced review.

"The memo makes it clear MAF has yet to determine whether or not there is a problem with the milk price. This is consistent with the views expressed by MAF officials at a Commerce Committee hearing on June 9.

"MAF's review was prompted by concerns expressed during industry consultation earlier this year. These industry competitors are complaining that Fonterra pays farmers too much for their milk and consequently charges them too much for the milk they source from Fonterra under DIRA regulations.

"The reality is that Fonterra is performing so well that some of its competitors are struggling to match the co-operative's returns."

Officials were looking at whether Fonterra's current farm gate milk price-setting methods were appropriate, and whether they were being appropriately applied.

The group was also looking at whether the process for establishing milk prices was acceptable and reasonable in terms of transparency and governance.

If the methods were not appropriate, the group would look at what the alternatives might look like and what the implications might be.

The group is being assisted by outside experts in competition policy, competition law and regulatory economics.

The briefing paper said officials had not yet reached any conclusions.

Fonterra was supplying "considerable commercially sensitive information" which officials were reviewing.

The group was also considering input from independent processors.

The review will conclude either that there was no problem with current pricing models, or that the Government's competition and public policy goals were being impeded.

If competition and policy were being impeded, officials could recommend a response.

The inquiry was anticipated to be concluded within "the next few months".

The briefing paper stressed that there was a considerable way to go before any conclusions were reached.

NZPA