An Assessment of the DIRA Triggers

30 March 2010
James Mellsop, Kevin Counsell, and Will Taylor

Fonterra is New Zealand's largest processor of raw milk, having been formed in 2001 by a merger of the country's two largest dairy cooperatives in operation at the time. The merger, which created a near monopoly supplier/monopsony purchaser of raw milk, only proceeded with special legislation designed to enable efficient entry and expansion by other milk processors, known as the Dairy Industry Restructuring Act (DIRA). The DIRA was specified to expire once certain market share triggers were met, which were intended to occur at the point at which a workably competitive market had formed.

In this report for the New Zealand Ministry of Agriculture and Forestry, a NERA team of Director James Mellsop, Senior Consultant Kevin Counsell, and Consultant Will Taylor (with support from Special Consultant Dr. Lewis Evans), considers whether, as the DIRA market share triggers are approached, there is a competition policy case for altering the triggers and extending the DIRA regulations. The authors find that, even when the current triggers are reached, Fonterra will still have a high market share. In addition, many competing dairy processors may still be in establishment mode and may be vulnerable to shocks and strategic behavior. The NERA team's view was that Fonterra was therefore likely to have the ability to exercise market power when the DIRA expired under the current triggers. This, combined with a finding that the DIRA imposed relatively low costs on Fonterra and the broader economy, led the team to conclude that there was a domestic competition policy argument for extending the application of the DIRA.