A full investigation by the Commerce Commission into dairy pricing is needed.

Recent moves by Fonterra and the two major supermarket chains to freeze domestic milk prices for the rest of the year are welcome, but we think a full investigation into dairy pricing is still appropriate.

Fonterra’s announcement came only after Minister of Agriculture David Carter said he was seeking advice from his officials about the rising cost of milk. We think the price freeze may just be a way of warding off a full pricing review.

Lack of competition

With just one supplier of milk, two suppliers of the main brands of cheese, milk and butter, and two supermarket chains there’s very little competition in the dairy market.  We think this lack of competition points to the need for much greater scrutiny of the New Zealand market.

When we last investigated dairy pricing in 2008, Fonterra blamed rising international dairy prices for the increase in domestic prices. It made no economic sense to sell products at a lower price here when the company could get higher returns overseas.

Our investigation looked at who was making what in the domestic supply chain. But finding out about dairy prices was no easy task. We estimated farmers got 37 percent of the cheapest two-litre pack of milk (see table below). The government (GST – at 12.5 percent) took its cut too. But the largest share – 52 percent – was split between the manufacturer and the retailer.

The exact split was hard to determine: Fonterra, its main rival Goodman Fielder, and the two main supermarket chains (which are the major retailers of milk) didn't want to reveal very much.  While lack of information about how prices are set might make sense in a highly competitive retail market, that isn’t the case for dairy products.

2008 ‘Who gets what’ chart
 

Guide to the table
Percentage shares were calculated on the milk-solid (fat and protein) component of the product. Cheapest prices were taken from the Statistics NZ Food Price Index; other prices were observed in supermarkets during April 2008.

Our view

We think consumers may be getting a rough deal because the normal competitive pressures don’t apply.  It’s time for the Commerce Commission to make a full investigation into dairy prices.

More from consumer.org.nz

• Dairy prices - our 2008 investigation

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