NZ First’s policy will not lower supermarket prices or improve competition

The proposal is structured around industrial-scale dairy processing, including ingredient production and higher-value manufacturing for export. Under the Dairy Industry Restructuring Act, independent processors using the proposed milk allocation would still have to pay the full farmgate cost-of-production benchmark for raw milk.

New Zealand’s raw-milk pricing is linked to Global Dairy Trade export parity. As a result, requiring access to additional milk would not lower the commodity cost underpinning products such as butter, cheese and fresh liquid milk. The proposed supply arrangement would therefore provide access to inputs without changing the price basis on which those inputs are valued.

Retail competition

Supermarket pricing is also affected by the concentration of grocery distribution in New Zealand. The country’s two dominant supermarket groups control wholesale margins and much of the available shelf space, according to the analysis of the proposal. Increasing the quantity of milk available to processors would not by itself create more competition at the retail level.

Large multinational buyers that use the proposed allocation would be expected to focus primarily on export markets. The markets identified in the analysis include countries across Asia and North America, where processors could sell higher-margin products. That orientation would not necessarily result in lower prices for dairy goods sold through New Zealand supermarkets.

Impact on Fonterra

The proposal would allow as much as 500m litres of milk to be diverted each season. That amount is ten times the current 50m-litre statutory limit under the DIRA framework. The arrangement would require Fonterra to provide raw milk to commercial competitors, while the co-operative would not receive the manufacturing margins generated further along the supply chain.

Fonterra’s farmer-shareholders could also face changes to the use of the co-operative’s processing system. Cooperative advocates say that removing milk solids from Fonterra’s high-efficiency plants could leave some capital underused, raise processing costs during the seasonal peak and distort the operation of the national milk pool. Those concerns relate to the commercial effects of supplying competitors rather than to the proposal’s retail-price mechanism.