27 Jul 2011

American expert rejects dairy company criticism

8:20 pm on 27 July 2011

An American competition expert rejects the view that smaller independent dairy processors are not getting a fair deal under New Zealand's dairy regulations.

Princeton University Professor of Economics, Dr Robert Willig, is the lead author of a report commissioned by Fonterra from international competition specialist Compass Lexecon.

The report concluded that the way Fonterra calculates its farm gate milk price is sound and that competition in the New Zealand dairy industry has grown since the giant co-operative was created under the Dairy Industry Restructuring Act (DIRA).

The report has not convinced the country's second biggest dairy processor Open Country, however. It is pushing for changes to the legislation because it says Fonterra, with 90% of the market, is still far too dominant and is stifling competition.

Dr Willig says the industry has performed well and very competitively in the 10 years since Fonterra was formed and the legislation set the policy context.

He dismisses criticism of the way Fonterra calculates its milk price, which is based on global prices for commodities, less the costs of a notional competitor, rather than actual costs. He says the calculation means a fair and economically efficient price.

Dr Willig also rejects the suggestion that the Compass Lexecon report is a draft based on limited information.

He says the report made public last week was the final version and the authors had all the information they needed to properly analyse Fonterra's milk pricing method.