There is still not enough competition in the dairy industry for it to be completely deregulated, according to the Commerce Commission and it believes consumers would suffer if it was.
The Commission released its final report on the matter today and it has recommended the government overhauls the factory gate market to boost competition there.
The factory gate market is where suppliers provide raw milk to each other, for example when Fonterra supplies milk to Goodman Fielder.
When the Dairy Industry Restructuring Act was passed in 2001 it merged New Zealand's two largest dairy companies to create Fonterra giving it a 96 percent market share.
It also introduced rules such as Fonterra having to supply milk to other companies to try to ensure competitors could survive in a market so heavily dominated by one company.
The Commission has been reviewing the act and deputy chair Sue Begg told a media conference this morning there was still not enough competition in the dairy sector for it to be completely deregulated.
"We consider that the regulation has reduced the barriers to entry particularly at the farmgate level and has constrained Fonterra's market power."
But it said that competition was "substantially by region".
In some regions there had been little development of competition, for example Northland where Fonterra had almost 100 percent market share, to areas such as Canterbury and Southland where there had been a reasonable increase in competition.
"But little competition has developed in the factory gate market - to a large extent Fonterra is the key player in that market," Mrs Begg said.
"We think that if deregulation occurred now, that would allow Fonterra to increase the price of the raw milk it sells to producers - processors who are producing dairy products for the New Zealand market - so our concern here is the implications for domestic consumers of dairy products."
The Commission outlined how the factory gate system should be changed.
"We're suggesting officials say to Goodman Fielder; 'Sorry you don't have your 250 million litres of milk anymore, over these next five years that's going to reduce in a phased manner. You're going to have to go out and get your own farmers, or negotiate either with Fonterra or other processors for that milk'", Ms Begg said.
Ms Begg said the Commission was also recommending the open entry rules governing new dairy conversions were removed so they did not impose costs on Fonterra.
The Commission recommended another review was carried out in five years, or when independent processors collect 30 percent of the milk in both the North and South Islands.
The report will now go to the Minister for Primary Industries Nathan Guy who has 90 days to respond.