Editorial: Let market set what we pay for milk

High world dairy prices are good news for NZ. Photo / Janna Dixon

Fonterra's decision to reduce the domestic price of milk at the end of the month can be welcomed if it is being done for the right reasons. Unfortunately, the company has given the impression it wants to shield domestic consumers from rising international prices. If that is so, it is at risk of feeding a debilitating fallacy that products ought to be cheaper in their country of origin.

The domestic cost of milk aroused resentment last year, prompting the Commerce Commission to take a look at competition in wholesale and retail supply, and Parliament's commerce committee to begin a separate inquiry.

The commission found supermarkets and wholesalers to be competitive enough, and concern turned to the farm gate price, set by Fonterra to a formula it would not disclose. A team of Government officials has been investigating further.

Meanwhile, Fonterra has come under new management. Chief executive Andrew Ferrier stepped down after eight years at the end of September. His replacement, Theo Spierings, almost immediately declared the company would take a fresh look at retail prices.

"It looks like a normal retail scene," he said after visiting local outlets, "but the perception is the price is high and for me always, when you connect to consumers, customers and community, perception is reality."

That is a philosophy of public relations, not far-sighted marketing. Fonterra is a leading international supplier of a premium product. It need make no apologies for the fact that a fresh, farmed nutrient now costs more than manufactured drinks, and that demand for milk is rising with prosperity in places such as China.

The New Zealand market is so small that a domestic discount might not be difficult for Fonterra, but a successful trading nation should not expect one. All we should expect is a truly competitive industry at all stages from the farm to the final consumer. Mr Spierings' philosophy tells us nothing about that.

If he believes perception is reality, he might concern himself with the serious perception that Fonterra is stifling competition at the farm gate. If the national dairy farmers' co-operative is maintaining raw milk prices at levels that independent processors cannot possibly match, then Fonterra might very well be able to charge a higher price in New Zealand than it could sustain in places with more domestic competition.

The Commerce Commission was unable to investigate farm gate prices, so we await the reports of officials and Parliament's committee to discover whether that particular perception might be reality. It is a perception that can only be strengthened when the company announces it can shield New Zealanders from a rise in international prices.

Every country presents a different market to a global supplier, depending on the popularity of its product there and the competition it faces. In New Zealand the milk price has risen higher than the market will bear and consumption is falling. Fonterra acknowledged that problem when it announced a trial of free milk for schools in Northland this year.

If falling consumption is the real reason Fonterra has now decided to drop its price, it is a sound commercial decision and the company should present the decision in those terms. It should not pretend it is an act of generosity or protection.

People living in competitive economies expect to pay international prices for all products, especially those home-grown.

High world dairy prices are good news for New Zealand and we should pay no less, or more, than milk is now worth. If we are paying too much we need multiple suppliers, not a monopoly's price concession.