New Zealands government could launch inquiry into milk prices

New Zealand's government could launch inquiry into milk prices

The way Fonterra sets New Zealand's national milk price is "sound", according to a report commissioned by the dairy giant.

A study by US-based anti-trust consultants Compass Lexecon concluded that the way Fonterra calculates its milk price is correct and that competition in New Zealand's dairy processing sector has increased since the company was formed in 2001.

The publication of the report comes as New Zealand's Commerce Commission considers whether to launch an inquiry into retail milk prices. A decision is expected next week. The country's Ministry of Agriculture and Forestry is also looking into how Fonterra sets farm-gate milk prices and, separately, at the laws on how the company supplies raw milk to independent processors.

Critics have claimed that Fonterra is driving up farmgate and retail milk prices, stifling competition by preventing rival processors from recruiting farmers and making milk products too expensive for consumers.

However, today Fonterra pointed to the Compass Lexecon report, which, it claimed found there had been a "growth in competition" in New Zealand's dairy industry since 2001.

The report stated that there had been "significant investment" in expanded processing capacity in the country by Fonterra and its competitors.

It found that the calculation Fonterra uses for its milk price - based on global commodity prices, less the costs of a notional competitor - is "correct".

Fonterra also noted the report's conclusion that domestic dairy prices in New Zealand had increased at a lower rate than global prices. The report said this was largely due to the growth of supermarket home brands at a discount.

Jonathan Mason, Fonterra's CFO, said the report "essentially concluded that the New Zealand environment was fostering competition in the dairy sector and that the way Fonterra set its milk price was fair".

Mason added: "The milk price reflects international dairy commodity prices, less the costs to produce and export those commodities. We hope the high quality research done by such a respected international expert as Compass Lexecon will be helpful to officials reviewing these issues."

Fonterra also said today that it would cut butter and cheese prices next month in line with falls in international prices.

Peter McClure, MD for Fonterra's brands division, said: "Butter and cheese prices in New Zealand increased in April, however, since then international prices have dipped and we will see these decreases flow through to consumers from next month.

"In February, we announced a freeze on the wholesale price of fresh milk in New Zealand. At this stage there are no changes planned to fresh milk prices, but if international milk prices drop significantly we will of course flow these decreases onto consumers."

Fonterra was created a decade ago with the merger of the New Zealand Dairy Board, New Zealand Dairy Group and Kiwi Co-operative Dairies.

However, the combined company collected around 96% of New Zealand's milk production and the country's government legislated to ensure Fonterra would make up to 600m litres of raw milk available to other processors.

"The Government's goal is to promote fair and efficient dairy markets in New Zealand and after ten years, it's timely to revisit the raw milk regulations," Agriculture Minister David Carter said on Tuesday.

"The review of the raw milk rules covers such issues as how much regulated milk independent processors should have access to, and for how long; and the total volume of regulated milk that should be made available each year."

Carter added that the way Fonterra set farm-gate milk prices was being looked at separately from the work carried out on reviewing regulations on raw milk.