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 (the price per kilogram of milk solids that is set by Fonterra for that season) for each dairy season. This review assesses whether the manual is consistent with the efficiency and contestability purposes set out in the milk price monitoring regime in the 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 inputs, assumptions, and processes used in the base milk price calculation provide an incentive for Fonterra to operate efficiently and are practically feasible for an efficient milk processor.

The Dairy Industry Restructuring (Fonterra Capital Restructuring) Amendment Act 2022 strengthens the Commerce Commission’s oversight of Fonterra’s base milk price-setting arrangements. These reforms give the Commission additional powers to issue binding directions on Fonterra’s use of inputs, assumptions, and processes, arising from its reviews of the milk price manual and milk price calculation. The amendments also specifically provide for the Commission to review how Fonterra has used assumptions where  the DIRA states that their inclusion does not detract from the achievement of the efficiency and contestability purposes (such as those relating to forex gains and losses, yields and collection costs).

Our monitoring role is concerned only with the base 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 price for farmers' milk in New Zealand is set by Fonterra using an ‘administrative’ methodology as there is not currently a workably competitive market process to derive this price. Fonterra’s price for farmers’ milk largely determines the price other dairy processors must pay to attract milk supply from farmers, as Fonterra retains a dominant share of the domestic raw milk supply. 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 market for the purchase of farmers’ milk. As Fonterra retains some interest and control in setting and applying the rules to the calculation, 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.

The DIRA requires the Milk Price Panel to supervise the calculation of the base milk price by an external third party, to advise Fonterra on the application of the manual, and to recommend the base milk price to Fonterra. The panel must include two members who are nominated by the Minister and a fully independent chair.

Read more about the Dairy Industry Restructuring Act – NZ Legislation.