Review of the Raw Milk Regulations

Dairy processors need some immediate certainty about supply.

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Agriculture Minister Jim Anderton today announced that the Government is reviewing the Dairy Industry Restructuring (Raw Milk) Regulations 2001.

"The Government and the industry are increasingly aware that these Regulations are under severe pressure," Jim Anderton said. "This has become particularly apparent in recent months, as demand for milk under the Regulations has exceeded the maximum volume of 400 million litres for the first time."

The comprehensive review will begin immediately and any necessary changes to the Regulations are expected to be in place in time for the 2009/10 dairy season.

A key element of the proposed review will be reassessing the current pricing mechanism. Fonterra has long maintained that the regulated price is relatively cheap.

"At this stage, we don't know whether that is in fact the case," Jim Anderton said. "But the fact that some processors continue to buy milk under the regulations, despite having their own suppliers, indicates that it's worth looking into this issue."

The Government will also put in place some interim changes to the Regulations, which will apply only to the 2007/08 and 2008/09 seasons.

For the 2007/08 season, Fonterra will be required to supply up to 500 million litres of raw milk at the regulated price - 100 million litres more than the current requirements. For the 2008/09 season, this volume will rise again to 600 million litres. The Dairy Industry Restructuring Act enables the Government to regulate up to five per cent of the milk that Fonterra collects, which is presently approximately 750 million litres.

"Dairy processors need some immediate certainty about whether or not they will be able to access raw milk under this mechanism, and at what price," Jim Anderton said. "We want to give them that immediate certainty. However, there can be no guarantee that those processors with their own milk supply who are competitors of Fonterra will continue to have access to Fonterra's milk supply in the longer-term."

Background
- The Dairy Industry Restructuring (Raw Milk) Regulations 2001 ("the Raw Milk Regulations") require Fonterra to supply up to 400 million (M) litres per season to independent processors at a regulated price. The 400 M litre block of regulated milk represents approximately 2.7% of Fonterra's total milk supply.

- The Raw Milk Regulations were part of a suite of pro-competitive measures agreed at the time of the 2001 industry restructuring, aimed at mitigating the effects of creating a single firm with around 95% of New Zealand's milk production.

- Under the Raw Milk Regulations, processors must take milk in October in order to take milk in other months, as October is the peak month for New Zealand's milk production.

- Under the open entry and exit regime outlined in the Dairy Industry Restructuring Act 2001 (DIRA), which is the empowering Act, farmers can choose to switch to another processor. In the case of Fonterra, the cooperative currently requires farmers to declare their supply intentions for the forthcoming season between December and February of the prior season (i.e. if a processor wanted to source new farmer suppliers for the 2007/08 season then they needed to have done so by February 2007).

- The DIRA enables the Government to regulate up to 5% of Fonterra's milk supply, which equates to approximately 750 million litres.

- The intentions behind the Raw Milk Regulations were:
. to protect the position of firms that previously purchased milk from either of Fonterra's predecessor cooperatives
. to protect NZ consumers from anti-competitive behaviour from Fonterra
. to provide an entrance pathway for new processors

- The 400 M litre block of milk was never intended as 'cheap milk' or to attract entry into the industry on the basis of 'cheap milk'. The intention was always that the milk would be 'fairly' priced.

- The Regulations do not address what should happen when demand exceeds the 400 M litre threshold.


Current Issues
- Fonterra has long argued that the regulated price for the 400 M litres of milk is comparatively 'cheap'.

- Fonterra also questions the ability of larger and established processors with their own suppliers to purchase regulated milk.

- In the 2007/08 season, for the first time, the volume of milk requested by independent suppliers under the Regulations will exceed 400 M litres.

- Prior to this season commencing, independent processors sought information from Fonterra about how regulated raw milk would be allocated and whether additional milk would be provided (and if so, at what price). Fonterra did not communicate their supply intentions for the 2007/08 season until after the season started.

- Fonterra first offered regulated milk on a pro-rata basis to some processors, where part of what they required was supplied at the regulated price and the balance was offered at a substantially higher price. Fonterra then switched to a 'first in, first served' allocation system when the legality of their original proposal was challenged.

- A consequence of a first in, first served allocation system is that the quantity of regulated milk is expected to be exhausted by February 2008.

- The result of the factors above is considerable uncertainty within the dairy processing sector.


Review of the Regulations
- The Government has directed officials, led by the Ministry of Agriculture and Forestry, to undertake a review of the Raw Milk Regulations.

- A key element of this review will be on how milk is priced under the Regulations.

- The Government considers that the Regulations should price milk 'fairly' (i.e. neither under-priced, nor over-priced).

- The review is to be completed by 31 July 2008, which would allow time for any changes to the Regulations to be made by the end of 2008 in preparation for the 2009/10 season.