THE Productivity Commission rejected calls for more government involvement in the dairy industry and said aspirations to create a national champion like New Zealand's Fonterra were simplistic and misleading.
The commission shot down analysis by consulting firm McKinsey, for the Business Council of Australia (BCA), that ''more purposeful market design'' by government could bolster dairy.
"The Fonterra experience in New Zealand does not readily translate to the present-day Australian dairy industry environment, and would not seem to justify regulatory intervention by governments," chairman Peter Harris said.
Its report, Relative Cost of Doing Business in Australia: Dairy Product Manufacturing, says dairy is a price taker and building scale by creating a regulated monopoly – an 'Australian Fonterra' – would not give the industry global power market.
From 2002 to 2012, Australia's share of global dairy trade fell from 15 per cent to 7pc and milk production dropped from 12.3 billion litres to 9.2 billion litres.
Over the same decade, New Zealand's dairy exports and milk production grew rapidly.
Fonterra was created when the law was changed to allow the two largest milk co-operatives to merge.
The commission disagrees that Fonterra is the key difference, pointing out the impact of drought, alternate land uses and the strong dollar.
"While the benefits of scale economies can be significant, suggestions that Australia should adopt an industry structure similar to that of New Zealand, with one dominant dairy manufacturer, appear to be based on a simplistic comparison of the export performance of the two countries' dairy industries," the report says.
"The most beneficial dairy industry structure will be determined by the marketplace. Attempts by government to 'second guess' market outcomes to achieve a particular industry structure are fraught with difficulty, and likely to impose net costs on the industry."
No picking winners
The findings undermine the BCA's call for government to promote specific industries, such as agriculture, which has been derided by critics as "picking winners".
The report backs up the Australian Competition and Consumer Commission (ACCC), which baulked at Murray Goulburn's bid for Warrnambool Cheese & Butter, which was acquired by Canada's Saputo after a three-way battle.
The commission agrees greater scale from consolidation could bring benefits and notes that because dairy is internationally traded, domestic producers are constrained competitively by imports as well as by domestic rivals.
Dairy is Australia's third-largest agricultural industry and generated a wholesale value of production in excess of $13 billion in 2012-13. About 60pc of Australian dairy output is sold domestically.