First statutory review of Fonterra’s milk price manual

Commission releases draft report on first statutory review of Fonterra’s milk price manual

The Commerce Commission has today released a draft report on its first statutory review of Fonterra’s milk price manual. The manual determines how Fonterra calculates the farm gate milk price, which is the price paid by Fonterra to dairy farmers for their raw milk.

This is the first of two statutory reviews that the Commission is required to undertake each milk season under the 2012 amendments to the Dairy Industry Restructuring Act 2001 (DIRA).

This first statutory review requires the Commission to report on the extent to which Fonterra’s milk price manual is consistent with the purpose of the milk price monitoring regime. The purpose of the regime is to promote the setting of a farm gate milk price that provides incentives for Fonterra to operate efficiently while providing for contestability in the market for the purchase of milk from farmers.

“Our initial observations are that Fonterra’s manual is materially consistent with the purpose of the DIRA milk monitoring regime. There are a couple of elements that we consider are inconsistent with the purpose of the Act, but they have only a minor impact. There are also a few matters that we consider may not be consistent, but we don’t have sufficient information at this stage to form a view. We are seeking that information in response to this draft report,” said Sue Begg, Commerce Commission Deputy Chair.

“Given the difficulty of looking at the manual in isolation, we will look more closely at the practical application of some aspects of the analysis when we undertake the second review next year,” said Ms Begg.

The second statutory review each milk season requires the Commission to report on the extent to which the assumptions adopted, and the inputs and processes used by Fonterra in calculating the base price, or farm gate milk price, for the season are consistent with the purpose of the Act.

The Commission is seeking comments from interested parties on the draft report by 15 November 2012. The Commission intends to publish its final report by 15 December 2012.

You can find the draft report on the Commission’s website: www.comcom.govt.nz/statutory-review-of-milk-price-manual

Background

Under section 150H of the Diary Industry Restructuring Act 2001 (as amended July 2012) the Commission must review Fonterra’s milk price manual for each season and report on the extent to which it is consistent with the purpose set out in section 150A of the Act.

The Commission released its report on the dry run review of how Fonterra sets its farm gate milk price (base milk price) in August this year. The Commission undertook this non-statutory dry run review at the request of the Minister for Primary Industries to help inform investors ahead of the launch of Trading Among Farmers, and to show how the Government-proposed milk price monitoring regime would work in practice.

This review is different in scope in two main ways from the dry run review of Fonterra’s farm gate milk price that the Commission undertook earlier this year. The dry run review only considered a number of key assumptions from Fonterra’s milk price manual. This statutory review considers all elements of the manual. The dry run review also considered both the extent of the consistency of the milk price manual with the purpose of the DIRA and the application of the milk price manual. This review is limited to the first of these tasks.

You can find more information about the dry run review on the Commission’s website: www.comcom.govt.nz/media-releases/detail/2012/commerce-commission-releases-report-on-dry-run-review-of-fonterra-s-farm-gate-milk-price

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