Sunday, 17 April 2011

Milk price regulation would be 'collective suicide'

Well 'collective suicide' may be going too far, but this article from does make some good points. It is not yet clear that milk price regulation is a good idea.

The article states,
New Zealand would be committing 'collective suicide' if the government agreed to demands for an independent commission to set the domestic milk price, claims Fonterra chief executive Andrew Ferrier.

"It would be an astonishing backward step for New Zealand – every aspect of our international trade policies is around free markets," Ferrier said in response to industry campaigners taking their call for a milk price regulator to Minister of Finance Bill English. "It would be a massive step back to the dark ages. There are internally established milk prices in the US and Europe and it is commonly known to be their failure. It is everything we have been lobbying against for 30 years [in overseas markets]."
Apart from getting the government some brownie points with voters it's not clear what problem regulation of milk prices is going to fix.

The stuff article continues,
A complaint to the Commerce Commission alleging Fonterra is artificially inflating the milk price, thereby distorting wholesale and retail prices, proved the tipping point for the competition watchdog, which has announced a preliminary investigation of the domestic market.
As I have said before I'm not sure how "artificially inflating the milk price" is anti-competitive. The higher the price, the more competition is attracted.
"When governments intervene in industries they cause enormous secondary problems that are not easy to foresee."

He cited the example of Argentina, about four years ago. When world prices were too high for the domestic market's liking, the government set a domestic market price.

"Literally within weeks, all the major dairy companies figured 'we can't afford to sell at that price' so they started exporting more. Why wouldn't they? To stop the exporting [increase] the government put on an export tax ... it actually bankrupted some companies. The legal implications are mind-boggling."
If you can sell in two markets, one of which pays you more than the other, it seems obvious which one you will sell in.
"The question is, what problem are they trying to solve? The Fonterra milk price is really very simple. It is the returns [to Fonterra] of the world market, minus the costs of making the powder to sell in world markets."
And this is the real question: are we paying the world price? If so, what is the problem?


dragonfly said...

My gut feeling is that Fonterra does rip off the domestic consumer, simply because, having bypassed the Commerce Commission etc and having undue market power, it can. I have long seen Fonterra as an evil empire (a little emotive, I know), but I saw them that way even before the San Lu melamine episode (Fonterra's role in that, in particular the rapidity of its response once it had been informed of the melamine problem, has never been fully brought into the light).

The bizarre price freeze on milk (with all its Muldoonist echoes) is evidence that Fonterra does not operate in a truly competitive manner in NZ. I gather that the commercial entities Fonterra supplies milk to are not beneficiaries of the price freeze, making competition with Fonterra more difficult for them now.

Fonterra's opposition to a Chinese buy-up of dairy farms is notable. My impression is that they know full well that this may eventually lead to genuine competition in the domestic market, and that's the last thing they want. Encouraging such competition via Chinese ownership would be a much better solution to the problem of Fonterra's market dominance in the domestic market than government regulation of milk prices (which is a chilling prospect).

Paul Walker said...

dragonfly: Even if you are right I don't see how regulation of the milk price is the answer. The issues you raise would be better dealt with by changes to the legislation determining the creation, structure and regulation of Fonterra and dairy markets in New Zealand.

dragonfly said...

Paul, you have misunderstood me - I meant that price regulation was the chilling prospect (not Chinese ownership of dairy farms) - I see now my final sentence was maybe a little ambiguous.