US report defends Fonterra milk price
Dairy giant Fonterra has struck back at claims it is stifling competition in New Zealand and criticism of its role in setting the national milk price with a report by an international consultancy which finds the accusations are groundless.
United States-based Compass Lexecon has concluded that competition in New Zealand dairy processing has increased since Fonterra was created in 2001 and the way it sets the farm gate milk price, the default price for all milk, is sound.
The Fonterracommissioned report has been provided to Government officials currently putting Fonterra’s milk pricing practices under the microscope following public and industry complaints about the high price of its milk and Fonterra’s ability to set it.
Fonterra controls about 90 per cent of the country’s raw milk supply, which critics claim is having negative downstream effects on competition in the wholesale dairy sector and on retail pricing.
The report found there had been growth in competition under the Dairy Industry Restructuring Act, legislation passed in 2001 to ensure a competitive domestic market for milk and promote processing competition in the face of Fonterra’s market dominance.
It found there had been significant investment in expanded dairy processing capacity by competitors as well as by Fonterra and the investment in new more efficient plant was driving down manufacturing costs.
The report also found the way Fonterra calculated the milk price, based on global prices for commodities less the costs of a notional competitor, was correct.
It said domestic prices had increased less than global prices for dairy product, largely because of the growth of supermarket home brands sold at a discount.
About 70 per cent of domestic fresh milk sales in New Zealand were now home brands, the report said.
Fonterra, however, supplies all the milk for those home brands.
Compass Lexecon endorsed the fact that the Fonterra milk price was based on the costs of a notional competitor using efficient processing facilities, rather than on Fonterra’s actual manufacturing costs.
Fonterra chief financial officer Jonathan Mason 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.
RAW DEAL: The price of daily grocery items such as milk has soared.