The Commerce Commission has found that Fonterra’s method for setting the benchmark Farm Gate Milk Price is “not inconsistent” with its obligations under the Commerce Act to ensure potential competitors are able to compete with it.
The competition watchdog released its report following a “dry run” review of the FGMP process, concluding it “does provide for contestability in the farm gate milk market, as overall the assumptions Fonterra used in setting the price are practically feasible for an efficient processor.”
“The assumptions also provide incentives for Fonterra to efficiently.”
That was despite Fonterra providing insufficient information on some six of the 13 legislative requirements relating to the FGMP to allow transparency, including a lack of transparency on yields, which the commission judged to have “very high” potential impact on the price.
Disclosure on yields was “not transparent” because the “methodology for calculating yields (is) not clearly stated in (the) milk price manual.”
While the dry run exercise and future reviews do not require the commission to assess the transparency of the milk price manual, “we have identified areas where we will require further information for the next and/or analysis by Fonterra, and other areas where we consider that the clarity and content of Fonterra’s milk price manual can be improved.”
However, the commission concluded the regime “is not inconsistent with the purpose and principles of the milk price regime set out in the Dairy Industry Restructuring Act.” . . .
. . . The regulatory regime for establishing a milk pricing benchmark regime is essential to encouraging domestic competition for Fonterra, and the dry run process saw submissions from a range of independent processors who have argued Fonterra is able to set the FGMP to suit its commercial needs best.
The commission says the amended Act does not require an existing producer to be able to achieve the level of efficiency implied by the FGMP.
“As long as Fonterra or a potential entrant achieve that level of efficiency, then that ensures that the FGMP reflects a practically feasible level, and would provide a normal return on incremental investment.”
Economies of scale give Fonterra an advantage.
That is quite different from being anti-competitive and suppliers here ought to appreciate the benefits we get from the co-operative model which ensures farmers aren’t caught in the crossfire between retailers as they have in Australia.
Farmers there have had to accept lower prices for their milk, effectively subsidising milk companies and supermarkets.