A couple more points on milk

We wrote about the milk price investigation here, all very exciting.

However, a new article on the stuff site started with this:

Dairy market heavyweight Fonterra is artificially inflating the price of milk in New Zealand in a deliberate campaign to lessen competition

What?  This is beyond my understanding – I need someone to get in here and explain to me how increasing the wholesale price of milk will lead to a reduction in competitive pressures.

My first thought was that there was some Green and Porter esque competition issues (eg – such that the loss of competition is the result of tacit collusion) – then I realised that we are saying Fonterra is a monopoly, so I can’t see too much in the way of strategic interaction …

[Update:  Glad to see that Anti-Dismal also finds the claim strange (here and here), especially since he is actually an industrial economist – which implies he has more idea about these things then I do.]

Anyway, on the note of Fonterra setting prices there is this interesting point from Fonterra:

New Zealand manufacturers have to pay the same price Fonterra pays its farmers for export returns.

Given that the export prices are set on world markets where Fonterra’s market power is severely crimped (due to competition, or effective competition, in many markets) and given that this is the price it is sold at in NZ – we can say that Fonterra is effectively competitive right.

So if we are going to moan about milk prices we have to blame supermarkets, which I’m still not convinced on to be honest.