Editorial: Fonterra price freeze timely move for all

Minister of Agriculture David Carter. Photo / Christine Cornege

When Fonterra froze the domestic wholesale price of milk for the rest of the year, it claimed to have "heard the pain and the difficulty that consumers are having". It also denied the step had been occasioned by Government pressure. Yet Fonterra cannot have been unaware of the potential repercussions of a report on the competitiveness of the domestic milk market requested shortly before by David Carter, the Minister of Agriculture. Indeed, the freeze is as much in its long-term interests as it is of short-term benefit to consumers who have struggled to meet an 8.7 per cent increase in milk's retail price in the past year.

Mr Carter ruled out Government intervention to keep milk prices down. Instead, quite correctly, he pointed to the benefits that accrue from higher international prices for this country's commodities. "More money flows into the New Zealand economy, which means more money being available for domestic consumers," he noted. Higher world prices also tend to propel the New Zealand dollar higher, which delivers cheaper imports.

Yet the mere fact that Mr Carter felt the need to ask officials to examine whether the local milk market was working well for consumers pointed to a possible blot on this rosy landscape. The report would throw the spotlight on Fonterra's privileged position.

When it was formed, the company's importance to the national economy meant it was allowed to escape Commerce Commission scrutiny, and a likely veto on the grounds that it would impede competition. The government of the day sought to ensure internal competition would not suffer as Fonterra took on the Nestles of the world by instructing it to sell some of its domestic operation. A decade down the track and following ownership changes, the outcome has been decidedly patchy.

Any Government response would have focused on this market. That, however, has been pre-empted by Fonterra's action. The more radical step of direct government intervention in pricing should never be an option. Not only would it have a distortionary impact but it would invite a conclusion that a government would bow to pressure on such issues if the level of complaint was sufficiently strident and sustained.

As it happens, Fonterra saw the writing on the wall. In part, its decision to freeze the wholesale price of milk was based on market realities. In any situation, it can pass on only as much of increased international prices as a market can bear. Always, it must search for the right balance. With soaring dairy prices over the past few months, there is no reason to doubt Fonterra's claim that it has already absorbed about $10 million of increased costs.

Equally, however, the company must acknowledge the peculiar nuances of its position.

If the people of New Zealand have no right to a say in Fonterra's affairs, they did accord it a special status. For them, the outcome has not been one of unalloyed benefit. Thus, while there is good reason for the domestic cost of milk to mirror the international price for the vast majority of time, there is equal cause for Fonterra to act as it has done.

When the freeze ends at the end of the year, a big leap in the price is unlikely. International prices are at record levels because of demand from China and tight supplies, the latter a result of lower-than-anticipated New Zealand production. But the market for milk is cyclical, as with all commodities. We are probably near the top of the present cycle.

Whatever the future, two things are certain. We should celebrate the current international prices, and we should appreciate Fonterra's readiness to acknowledge domestic constraints.