By Paul McBeth
The Commerce Commission doesn't see enough competition in the dairy sector to consider full deregulation, particularly at the processing level, which may benefit from a gradual loosening of the rules.
The regulator's draft report on dairy sector competition recommends a staged approach to amending the Dairy Industry Restructuring Act.
It recommends beginning with a review of raw milk regulations to help the processing competition to develop, and raising the thresholds in the North and South islands to 30 percent market share to trigger a review of the sector.
Last season, independent processors collected 22 percent of all milk solids in the South Island and 9 percent in the North Island, triggering the expiry of the provisions in the South Island by no later than the end of May 2018.
The commission was tasked with investigating whether Fonterra's 86 percent share of the local market gives it too much dominance as part of the legislation governing the sector.
"Our primary concern is that competition in the factory gate is very limited," deputy chair Sue Begg said.
"Without the existing regulations, Fonterra would be able to increase the price of raw milk it sells to other domestic processors. This could in turn result in higher retail process for dairy products in New Zealand."
The commission's draft analysis suggested a gradual relaxation of raw milk regulations could stoke development in the factory gate, mitigate the impact of some processors relying on Fonterra to source their raw material.
Submissions on the draft report close in December and the final report is due to the minister on February 29.