The Dairy Industry Restructuring Act (DIRA) sets out the regulations that govern the domestic dairy sector and Fonterra in particular.
Our primary role under the DIRA is to publicly report on the extent to which Fonterra’s milk price setting processes and calculations provide incentives for Fonterra to operate efficiently and are consistent with contestability in the market for purchasing farmers' milk.
What does our monitoring role cover?
We undertake two separate reviews each dairy season.
The first review concerns Fonterra's milk price manual (manual). The manual contains the specific methodology Fonterra uses to calculate its base milk price (also known as the farm gate price – the amount farmers should receive for each kilogram of milk solids) for each dairy season. This review assesses whether the manual is consistent with the efficiency and contestability purposes of the milk price monitoring regime as set out in the Dairy Industry Restructuring Act (DIRA). What this means is that we assess whether the rules and principles in the manual provide an incentive for Fonterra to operate efficiently and are practically feasible for an efficient milk processor.
The second annual review we undertake is of Fonterra's base milk price calculation at the end of each dairy season. This review assesses whether the costs, revenue and other assumptions used in the base milk price calculation provide an incentive for Fonterra to operate efficiently and are practically feasible for an efficient milk processor.
Our monitoring role is concerned only with the farm gate milk price. We do not monitor retail dairy prices or any other prices in the value chain.
Why do we need a milk price monitoring regime?
The creation of Fonterra in 2001 meant that it controlled 95% of domestic milk production at that time. While there are independent processors that compete with Fonterra in some parts of New Zealand, and their market share has grown, at a national level there is not yet a competitive domestic market for the purchase of farmers’ milk. This means that Fonterra's price for farmers' milk largely determines the price other dairy processors must pay to attract milk supply from farmers.
The price for farmers' milk is set by Fonterra using an ‘administrative’ methodology. As Fonterra determines and applies that methodology itself, there is a risk that it might set a milk price that is ‘inefficient’ – either too high or too low relative to what it would be in a competitive market. A price that is too high could act as a barrier to efficient entry by processors. Our review and reporting on Fonterra's manual and calculation promotes greater transparency over its farm gate milk price setting processes, and greater confidence in the consistency of its farm gate milk price with contestability in the market for purchasing farmers' milk.
Read more about the Dairy Industry Restructuring Act: