Security Level – In Confidence
Distribution Minister Minister’s Advisor Minister’s Office
Date: 1 March 2011
Domestic Milk Market in New Zealand
Purpose You have asked for an overview of the domestic milk market in New Zealand. This briefing provides you with basic information including commentary on domestic prices for dairy products, the regulatory environment and the role for Government. Minister Minister of Agriculture Action Required: Note the contents of this brief Minister’s Deadline n/a
Comments As an exporting nation, New Zealand domestic milk prices are intrinsically linked to international prices which are trending upwards due to increasing demand. Rising international food prices can mean increased returns to the New Zealand economy. New Zealand has legislation in place to promote competition in the domestic milk market and to protect consumers from anti-competitive behaviour. Government intervention in domestic milk prices is not sustainable and would go against longstanding trade principles, potentially leading to repercussions from our trade partners.
Name Responsible Manager Andrew Hume
Position Manager, Sector Competition and Regulation Senior Analyst, Sector Performance Policy
Work 04 8940668
After Hours 029 8940668
Date Sent 22/02/11
Key Messages / Talking Points 1. Recent media attention on high domestic milk prices has led to calls from consumer groups and the media for the Government to intervene and impose price controls. Domestic dairy prices reflect trends in international prices received by New Zealand exporters. Because of its small size and reliance on trade, New Zealand is effectively a price taker in terms of international commodity prices. Currently, the flow on impacts of a constrained supply in main exporting countries and growing demand, especially from China, are driving international prices for dairy products. This is likely to continue for the foreseeable future. Other factors, however, also affect the price New Zealand consumers pay, such as the exchange rate, competition in the retail market and competition in the wholesale market. The Government promotes competition in the wholesale market through procompetition provisions in the Dairy Industry Restructuring Act (DIRA) and the Raw Milk Regulations. Under the DIRA, Fonterra was required to divest New Zealand Dairy Foods (now Goodman Fielder) to create a national competitor in the domestic market. Under the Regulations, Fonterra is required to supply up to 250 million litres of milk to Goodman Fielder, who sells most of its domestic milk supply products into the domestic retail market. Since the introduction of the DIRA and the Raw Milk Regulations, there has been increased competition within the market and alternative suppliers of dairy products entering the markets, which has resulted in new consumer brands becoming available in the supermarkets. Government intervention to reduce dairy prices is not a sustainable solution. It would reduce returns (and therefore incentives) from selling products in the domestic market and could encourage production exclusively for export markets, and therefore be self defeating. Any government involvement in domestic pricing would also go against longstanding trade principles and could lead to repercussions from trade partners. Private entities such as Fonterra, Foodstuffs and Progressive Enterprises have announced a price freeze on domestic milk prices; this is a commercial decision for these businesses to take. The Government has not had any involvement in these recent commercial decisions about milk price.
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Recommendations 9. MAF recommends that you: a) Note the contents of this brief.
Andrew Hume Manager Sector Regulation and Competition Sector Performance Policy