There is not enough competition in the dairy industry to warrent derugulation, but the Commerce Commission is recommending some changes, it says.
The commission released its draft report on competition in the dairy sector this morning, following the Minister for Primary Industries' request earlier this year.
The report is a requirement under the Dairy Industry Restructuring Act, which paved the way for the creation of the giant Fonterra co-operative in 2001.
The Act was designed to ensure competition in the New Zealand milk market to counter Fonterra's dominance and it requires the co-operative to supply some of its milk to other dairy processors at a formulated price.
Last season, independent processors collected more than 20 percent of the milk solids in the South Island, which reached the threshold in the act and also played a part in triggering the review.
Commission deputy chair Sue Begg said while competition between processors was growing, it was not at a point that regulations can be removed.
"At the moment we're concerned that with the state of competition in the factory gate - that's where Fonterra largely sells milk to other processors - because of the regulations, Fonterra is the primary party involved there, it has a very high market share.
"So our concern is that if the regulations are removed it would still have a high market share, and it would have an ability to raise prices to processors, and that would then be reflected downstream into higher prices for dairy products."
They were also recommending to Government the threshold for independent processors collecting milk solids be increased to 30 percent, she said.
"Our current view is that at 20 percent there isn't sufficient competition to move to deregulation. In the South Island the competition is above that, but still we don't think that's sufficient, so we've come to a judgement that a threshold around 30 percent would be appropriate."
When 30 percent of the milk supply in either island was taken by independent processors, it would trigger another review, she said.
