Review of the Dairy Industry Restructuring (Raw Milk) Regulations: Options for addressing industry concerns April 2008
Appendix A: Summary of key themes from submissions
The first discussion document sought feedback in four broad areas:
- Regulatory objectives;
- Access to regulated milk;
- The regulated (default) price; and
- Unregulated milk.
Additionally, submitters were asked to provide an overview of their main concerns in relation to the Regulations and to raise any other issues not covered by the discussion document.
A total of 39 submissions were received and were categorised as follows:
- Fonterra and Fonterra suppliers (19 submissions).
- Food and beverage companies (3 submissions).
- Small processors (up to 20 million litres, 8 submissions).
- Large processors (greater than 20 million litres, 6 submissions).
- Other stakeholders (3 submissions).
A full list of the parties that made submissions during the first consultation round of the Raw Milk Review is located in Appendix B.
Key issues raised by each group are outlined below.
Fonterra and Fonterra suppliers
The top three concerns expressed by Fonterra and Fonterra suppliers were:
- Price: Submitters contended that they were, in effect, subsidising competitors due to:
- The regulated price being too low;
- The inability for the price formula to price for risk factors; and
- The ability for processors to use regulated milk to flatten their supply curves.
- Access: Submitters contended that regulated milk should be limited to processors without their own supply and/or to processors that sell products primarily on the New Zealand domestic market.
- Duration: Regulated milk should not be a long-term option as processors should be using the open entry and exit provisions outlined in the DIRA to source own supply.
Other concerns included:
- Winter Milk: The winter milk premium needs amending as its does not pass through the full costs of supply.
- Competition triggers: The South Island trigger posed the potential for gaming by processors through building plants that did not exceed 25 million kg MS in capacity.
Food and beverage companies
The top three concerns were:
- Quantity of regulated milk: The quantity of regulated milk made available should be increased to 5 percent of Fonterra’s supply (approximately 750 million litres) and indexed to increasing supply. Firms also outlined the importance of having reasonable expectations regarding the certainty and consistency of supply, as this enables investment planning.
- Price: Firms outlined the need to have a fair price so they are not put at a relative disadvantage vis-à-vis a competitor or competitors.
- Contract details: Firms outlined a myriad of detailed concerns such as how the regulated milk contracts with Fonterra.
Other concerns included:
- Milk profile: It was stated that there is considerable merit in being able to secure a square milk profile.
- Individual processor caps: It was argued that the current caps on individual processors need to be increased.
Small independent processors
The key concerns from small processors were:
- Price: Small processors also outlined the need to have a fair price across the board so they are not put at a relative disadvantage vis-à-vis a competitor or competitors.
- Access: Given that it is often impractical for small processors have to source their own supply, it was argued that this made small processors more dependent on regulated milk implying they should get priority access.
- Ex post pricing: A major concern is that the regulated price, being based on the Fonterra payout, is an ex post price and that this results in difficulty in managing major upward price fluctuations for firms that are selling throughout the year.
Other concerns included:
- Speciality milk: The ability to access organic and other specialty milk under the Regulations.
- Milk profile: Improved flexibility of supply outside peak months to square the season milk curve.
One submitter accessed milk under the 20% rule.10 Other submitters expressed the view that this rule would be useful but considered it unworkable at present.
Large independent processors
The key concerns from large processors were:
- Quantity of regulated milk: Large firms also argued that the quantity of regulated milk should be increased to 5 percent of Fonterra’s supply and indexed (indeed, it was also contended that given Fonterra’s share of the raw milk produced in New Zealand that 5 percent should be the minimum level of milk supplied under the regulations).
- Importance of an entrance pathway: The ability to purchase regulated milk was considered critical for new entrants with the corollary being that some firms could not have entered without access to this milk.
- Regulatory and legislative clarity: The Regulations need to provide greater clarity and thereby avoid lengthy legal proceedings.
Other concerns included:
- Consistency: that the regulations adhere to the DIRA.
- Access: the inability to access regulated milk based on the interconnected bodies corporate rules11 should be removed as doing so would enhance competition.
- Triggers: the South Island triggers should be a percentage of milk like the North Island.
- 20% rule: the ability to access milk under the 20% rule needs to be made workable.
10 The 20% rule permits a Fonterra supplier to divert up to 20 percent of that supplier’s milk on a weekly basis subject to an October rule (for example, milk must be supplied in October and milk supplied outside of October can be no more than 10 percent above the October amount).
11 Any two bodies corporate are to be treated as interconnected if:
– one of them is a body corporate of which the other is a subsidiary; or
– both of them are subsidiaries of the same body corporate.
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