Raw milk auction set to start
Legislation to introduce an auction system for raw milk looks likely to be given its first reading in Parliament early in May and may be enacted in time for the 2010/11 dairy season.
Ministry of Agriculture and Forestry (MAF) officials have discussed the proposed bill with industry representatives over two administrations.
Jim Anderton, the previous Minister of Agriculture in the Clark Government, issued instructions to change the Dairy Industry Restructuring Act (DIRA) to introduce an auction in time for the 2010/11 season.
The Government favoured an auction after a year of consultations.
Anderton said at the time that, if the present default pricing formula was continued, it would create a risk of processors making investment decisions that are economically unsustainable and could lead to over-capacity in the industry.
Fair
He said an auction would be a fair way of setting prices.
After the election, the new minister David Carter said he was satisfied with the auction proposal and timing.
The legislation will have to be enacted in time for the first auction to be held in November.
If it was held later than that, a MAF official said, anyone who was dissatisfied with the price or quantity of auction milk would be forced to wait a year before getting any supply.
Officials are confident of eliminating the risk of price spiking resulting from temporary shortages in supply.
If prices start climbing too high, processors will drop out of the auction or reduce the volumes they buy from Fonterra, and will have to seek supply directly from farmers.
As well as the consultation leading up to the auction, officials in recent months have been talking with the key companies who provided submissions to the raw milk review.
They hope that when the bill is sent to a select committee for submissions, industry players will have all details.
Not welcomed
The auction was not widely welcomed at first, exceptions being Federated Farmers and Synlait.
But since the Government decided to proceed with the system, Fonterra has accepted it, as long as the milk is priced sensibly.
Before the decision to go ahead, a paper to the Cabinet explained concerns of small processors, who faced being outbid by competitors and not getting any milk under the auction scheme.
The scheme is expected to overcome this by allocating milk to the small processors, who would pay the average auction price.
The DIRA of 2001 and Dairy Industry Restructuring (Raw Milk) Regulations of the same year were among measures agreed at the time of the industry restructuring that established Fonterra. They were aimed at mitigating the effects of creating a single firm with around 95 percent of the country's milk production.
The DIRA enables the Government to regulate up to 5 percent of Fonterra's milk supply.
The regulations were intended to protect the position of firms that previously bought milk from Fonterra's predecessor cooperatives, shielding New Zealand consumers from anti-competitive behaviour from Fonterra, and providing for new processors.
Regulated milk is priced at present by the default pricing formula, set out in the regulations and referred to as the default price.
Under the auction system, however, independent processors will bid to buy raw milk at the Fonterra farmgate price.
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