Review of the Dairy Industry Restructuring (Raw Milk) Regulations: Clarifying industry concerns and the Regulations’ intent
Industry concerns
Access to milk
Certainty of access
Concern about the certainty of access to milk seems to be driven by increasing demand for milk supplied under the Regulations. In 2007/08, demand exceeded the regulated 400 million litre cap for the first time.
In a scenario of demand exceeding the volume cap, independent processors face significant uncertainty about how much milk they will be able to access at the regulated price.
This scenario may have significant impacts on those processors who rely on purchasing milk from Fonterra, including:
• prospective new entrants;
• small or “micro” processors; and
• downstream processors.
A recent amendment to the Regulations increased the cap. However, this amendment applies only to the 2007/08 and 2008/09 seasons and is not intended as a long term solution. In the absence of any further changes to the Regulations, the volume cap would return to 400 million litres in 2009/10.
Who should have access to regulated milk?
Officials have heard some concerns about the ability of any independent dairy processor to access milk from Fonterra under the Regulations, regardless of whether they:
• supply domestic or export markets; or
• have access to their own sources of milk supply.
We would like to know:
• If you are an independent processor, are you concerned (or potentially concerned in the future) about being able to access raw milk from somewhere other than your own suppliers? If yes, why?
• If you are an independent processor, how has the Regulations’ operation affected your business decisions in the last 5–6 years about how to source raw milk supplies?
• Do you think that any independent dairy processor in New Zealand should be able to access raw milk from Fonterra under the Regulations?
• If not, what criteria do you think should determine access, or determine priority of access?
• Should processors be limited in the number of seasons they can access milk under the Regulations?
The regulated (default) price
Price level
Some in the industry have argued that the regulated price is relatively cheap, pointing out that some independent processors continue to take milk from Fonterra under the Regulations despite having significant suppliers of their own (who they pay at a higher price). A recent Supreme Court decision1 has reduced the regulated price, by locking Fonterra into using a particular method for calculating their cost of capital.
Others in the industry dispute that the regulated price is cheap and have applauded the Supreme Court decision.
Price certainty and the potential for price distortion
Some processors have expressed concerns that the regulated price (as determined by the formula in the Regulations) is neither certain nor predictable.
In its complaint to the Regulations Review Select Committee (and previously to the Commerce Commission), Open Country Cheese Company highlighted Fonterra’s ability to include the sale of investments as a “retention” for the purposes of calculating the default milk price under the Raw Milk Regulations. Open Country Cheese contends that this allows Fonterra to distort the default milk price in a potentially unpredictable manner.
We would like to know:
• Do you think that the pricing formula in the Regulations allows independent processors enough certainty to make sensible business decisions about buying milk under the Regulations?
• Do you think that the default milk price derived from the formula in the Regulations is generally a fair and efficient price? If not, do you think that the price is generally lower or higher than it should be?
• Do you think that a formulaic approach to milk pricing is appropriate, given the number of formal complaints and investigations that have taken place into various aspects of the pricing formula since 2001?
• Can you suggest an alternative approach?
Unregulated milk
Some independent processors have concerns about the price that Fonterra charges for unregulated milk (milk supplied outside the “default” milk provisions of the Regulations). The price of unregulated milk appears to have the most effect on those processors who have their own supply of milk but seek to buy milk when their supplies are not sufficient.
These processors may not be eligible to buy milk at the default price because they do not take any milk in October. Section 8(3) of the Regulations has the effect that if a processor does not purchase milk at the default price in October, that processor cannot require Fonterra to supply milk at the default price in other months of that season (August to September, and November to April).
We would like to know:
• What is your view on unregulated milk?
• Have you bought any milk at an unregulated price over the last 5–6 years?
• What factors would lead you to buy more unregulated milk?
Overview
Industry members have a range of concerns about the Regulations. Different issues seem to have a greater or lesser impact on different stakeholders, depending on their circumstances.
We would like to know:
• What are your top three concerns about the Raw Milk Regulations and the way they have operated over the last 5–6 years? How have these issues adversely affected your business?
• How have the Raw Milk Regulations assisted your business in the last 5–6 years?
• What do you think a “good” regulatory regime for access to raw milk would look like? How would this good regime achieve the policy objectives?
Any other concerns?
If you have any other concerns or issues that you think this document should have covered, please tell us what they are.
1 The Supreme Court considered the way the “annualised share value” component in the pricing formula is calculated. The Court found that this value must be calculated by using a cost of equity capital rate, rather than a weighted average cost of capital rate.
Contact for Enquiries
Policy Analyst
MAF Policy
Sector Performance Policy
Ph: 04 894 0580
Fax: 04 894 0745
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