Retail dairy prices could get a lookover in Fonterra's capital restructure talks with Govt

Fonterra's proposed capital restructure offers opportunity for retail dairy prices scrutiny. Photo / File

Dairy retail prices and the influence on them of the law underpinning dairy heavyweight Fonterra will likely get a new airing in Parliament, says Agriculture Minister Damien O'Connor.

"The issue of retail dairy and DIRA (Dairy Industry Restructuring Act) will no doubt come up when DIRA comes before Parliament again from the capital restructure proposals Fonterra is working through," he said.

"Perhaps this will be an opportunity to look at this, though it won't be a primary focus."

Asked if he would make a point during the capital structure talks of looking at the high prices of staples such as milk and cheese, O'Connor said: "People are perfectly entitled to request of the Commerce Commission a detailed analysis of the situation, as it's their role to provide advice back to the regulators as to whether we need to make some changes."

"We are very aware of the cost of food and the anomaly that our prices offshore are sometimes cheaper than those onshore. It's a complex situation."

Booming global dairy prices are pushing up retail prices at the store chiller.

New Zealand's dairy retail market is so small that the country exports around 95 per cent of its dairy production. This means manufacturers here - including Fonterra's domestic market arm Fonterra Brands - pay the same price for milk as global buyers.

The situation is further complicated by Fonterra, created 21 years ago from an industry mega-merger under the special enabling DIRA, still collecting around 79 per cent of all raw milk, and that the price of raw milk is subject to regulation.

While DIRA required the farmer-owned co-operative to provide some milk at a regulated price to export competitors and to local retail market manufacturer Goodman Fielder, the number of significant-sized suppliers to the retail market is small.

Most supermarket house brand milk is ultimately sourced from Fonterra, New Zealand's biggest business and the world's sixth largest dairy company by revenue (FY21:$20.6 billion).

The country's second-biggest dairy manufacturer, Open Country, only exports.
Exporter Synlait has launched a consumer foods arm called Dairyworks, which says it aims to become the second-largest player in New Zealand's consumer dairy foods category.

Another influence on retail prices is what O'Connor calls "the duopoly players in our food sector". He's referring to the two supermarket chains, Foodstuffs and Countdown (Progressive Enterprises).

"When I go to the supermarket it doesn't seem like (there is lack of competition) given the huge range of options be it cheese or milk, but clearly there are house brands and some supply arrangements that may limit the real competition rather than the perceived competition."

Fonterra and Foodstuffs, operator of New World and Pak'n Save, would not discuss Fonterra's market share. Countdown said Fonterra accounted for 19 per cent of dairy products available in its stores. Whether this included Fonterra-sourced home brand product is unknown.

The Commerce Commission could not provide information on Fonterra's domestic market share, nor could the Ministry for Primary Industries which oversees the provisions of DIRA.

To the Herald's suggestion that 21 years on from the introduction of DIRA, it was time to review Fonterra's influence in the retail market, O'Connor said he believed there was more competition at the non-supermarket retailer level.

"(But) the question you ask of arrangements between the duopoly retailers and how much that might affect the price of dairy (products) is one I'm not in a position to judge."

The Government was already looking into the role of the supermarkets (through a Commerce Commission study) and the primary food sectors themselves had identified the need to provide affordable food to Kiwis, O'Connor said.

"There's pressure and a dilemma when on one hand we are trying to push for more value from our export sectors but on the other hand ensure food is affordable for New Zealanders.

"Ultimately the Commerce Commission oversees the role of suppliers of all products ... I've not received any advice of lack of competition in this space.

"But that's not to say there is not some advantage being taken by all suppliers because of the lack of competition, or our arrangement with duopoly players in our food sector."

Fonterra chairman Peter McBride. Photo / Supplied

Fonterra chairman Peter McBride, a dairy farmer, said he was aware of concerns about retail dairy prices. But the board had not discussed how Fonterra could address the issue of some people struggling to afford staple dairy products.

"It goes back to that fine balance between supply and demand, and every dairy region around the world is under pressure from consumers to lower their environmental footprint."

Fonterra retail prices was a discussion for management, not the board, he said.

To a Herald suggestion that Fonterra Brands could be split from Fonterra export operations and a milk pool with a non-global market price dedicated to it to make staple products more affordable, McBride said "I don't see any change in that regard".

"I'm not sure we can. I'm not sure how that would work. I know milk is a staple - look at what people pay for water. Essentially it would be asking farmers to pay for that (delinking of prices)."

Asked if he could see a time when Fonterra would need to think about a delinking of global and domestic prices, McBride said it hadn't been discussed by the board so he couldn't comment.

"We have a commercial construct and we have competition. The dairy price is highly regulated in New Zealand ... if we dropped the price we would be undercutting competitors.

"It would be unsustainable, it has to be commercial. And these things come and go.

"You could lock yourself into something and it goes the other way. We have to run a commercial business.

"We can't get away from DIRA and regulations. That's the model we operate in. It's really intense, that milk price structure."

Asked if Fonterra could be more flexible in its retail pricing if not for DIRA, McBride said he wasn't sure, but the company "will always act commercially".