The Commerce Commission has given the thumbs up to Fonterra's method of setting the milk price for farmers.
The commission has released the initial results of a review into how the dairy cooperative sets the price it pays farmers for their milk. It is the main factor in the price of milk bought in dairies and supermarkets.
It says Fonterra's setting of the milk price is "not inconsistent" with the pricing regime set out in proposed legislation.
"Most of Fonterra's current assumptions appear to be both practically feasible for Fonterra to achieve and reasonable for efficient processors to replicate," commission deputy chairwoman Sue Begg said.
"The assumptions do not preclude all efficient competitors from potentially competing with Fonterra in the New Zealand farm gate milk market, and will provide incentives for Fonterra to operate efficiently."
The commission will present its initial finding to parliament's Primary Production Select Committee today and is also seeking submissions from interested parties.
The committee is considering the Dairy Industry Restructuring Amendment Bill which includes a proposal that the commission monitor and report on Fonterra's setting of the farm gate milk price.
Primary Industries Minister David Carter asked the commission to do a "dry run" to show how the monitoring would work.
Begg says it is important to understand the bill or the dry run review are not concerned with the retail price of milk, on the farm gate price.
"This is the price that Fonterra pays dairy farmers for their raw milk and is worked out using a pricing methodology set by Fonterra. It is this pricing methodology - and Fonterra's application of it - that we are reviewing," she says.
A monitoring regime will make Fonterra's process and calculations more transparent, she says.
However, the review was limited.
"We have focused on a limited number of key issues and that we have had to adopt a particular interpretation of the key provisions in the DIRA Bill. The final form of the legislation may differ from that proposed in the DIRA Bill."
The commission has also identified areas requiring further information or analysis by Fonterra, and other areas where clarity can be improved.