Officials still looking at Fonterra's milk price-setting - MAF

One of Fonterra's 450 milk tankers on its way to the Clandeboye plant in South Canterbury. File photo / NZ Herald

New Zealand's retail milk prices were being driven up by international prices for milkpowder and similar commodities, with questions raised over how diary giant Fonterra sets the prices it pays farmers for raw milk, an agriculture official told a select committee today.

"The Ministry of Agriculture and Forestry (MAF) recently reviewed domestic milk prices - we concluded that domestic milk prices reflected movements in international commodity prices for milkpowders," MAF's director of sector performance policy, Iain Cossar told Parliament's commerce select committee.

Statistics New Zealand last month said a 6.1 per cent rise in food prices in the year to April was the biggest annual increase since July 2009, and included a 9.3 per cent lift in the price of fresh milk.

But Mr Cossar said officials were also looking at the process Fonterra used to set its milk price paid to farmers.

"We are some way away from reaching a conclusion as to whether or there is a problem, and if there is a problem, how big that problem might be.

"Rivals to Fonterra have alleged that since 2008 the giant cooperative had changed the way in which it set its milk prices, so that farmers received more of their payouts from milk payments, rather than from dividend payments attached to each share," said Mr Cossar.

"The claim is ... that the new methodology that it introduced is over-pricing milk for farmers," he told commerce select committee chairwoman, Labour MP Lianne Dalziel.

"If that assertion was substantiated, it would raise serious concerns?," she asked Mr Cossar.

"If that was substantiated, it would, yes," he said.

It was one of a number of claims which the Commerce Commission that oversees Fonterra's enabling legislation - the Dairy Industry Restructuring Act (DIRA) - was separately considering, he said.

Mr Cossar said that the legislation was working - "to the extent that any perceived concerns are addressed to the Commerce Commission".

A Ministry of Economic Development (MED) official, Karen Chant, said that the commission was looking at three markets: the price paid for raw milk at the farm gate, the wholesale market for companies such as Goodman Fielder - which takes 250 million litres of Fonterra milk annually - and the retail price in shops such as supermarkets.

Raw milk regulations enabled other processors to obtain up to 50 million litres of milk each from an allocation of up to 600 million litres of Fonterra milk each year. New Zealanders drink about 400 million litres a year.

There were now five companies competing at the farm gate, with another one due to launch later this year.

Mr Cossar told Ms Dalziel that MAF would report to ministers "in the next couple of months". A public policy issue being considered was whether there should be a price-setter for the domestic market.

The rationale behind DIRA would have been that legislation provide sufficient incentives for Fonterra to ensure that it set a competitive price for farmers, said Mr Cossar who is responsible for reviewing aspects of the DIRA.

He noted that Fonterra's proposed "trading among farmers" which would allow farmers to buy and sell each other's cooperative shares could potentially influence those prices.

"Our focus here is to trying to understand how it is that Fonterra sets its milk price, whether it's appropriate methodology, whether the inputs are appropriate, and are there issues involved with it," said Mr Cossar.

If there were "issues", MAF would look at what to do about them, he told the committee.

- NZPA