INDEPENDENT NEWS

Commission concerned Fonterra's risk estimate is too low

Published: Thu 14 Jun 2018 09:05 AM
14 June 2018
Commission concerned Fonterra's risk estimate is too low when calculating milk price
The Commerce Commission has released an emerging view that Fonterra’s estimate of risk in calculating the cost of financing milk processing operations is too low. The impact of this is that Fonterra calculates a higher milk price than would be the case if it used a more feasible allowance for risk in the cost of finance, consistent with other processors.
The cost of financing (also known as the cost of capital) feeds into the calculation of the milk price Fonterra pays its farmers. The Commission administers a milk price monitoring regime under the Dairy Industry Restructuring Act (DIRA) as Fonterra has market power over the purchase of farmers’ milk.
“For several years now Fonterra has been unable to provide sufficient evidence to convince us that using a lower asset beta than comparable processers is justified,” Commission Deputy Chair Sue Begg said.
The asset beta is used to calculate the cost of financing milk processing operations, and in turn affects the milk price Fonterra pays its farmers. It reflects the extent to which the assets associated with processing milk are more or less risky than the stock market as a whole.
“We acknowledge that estimating the asset beta with reliability and confidence is difficult. However, after considering all available information, including submissions on the independent report we released in April on the subject, our emerging view is that Fonterra’ asset beta of 0.38 is not practically feasible.”
“We acknowledge there are differences between the risks borne by Fonterra and other comparable producers. However, based on the evidence we have, we do not consider the differences in the risks are sufficiently material or relevant to justify using an asset beta of 0.38."
We invite submissions on the report to regulation.branch@comcom.govt.nz by 5pm on 4 July 2018.
The emerging views paper can be found here.
Background
Purpose of the milk price monitoring regime
The purpose of the milk price monitoring regime is to incentivise Fonterra to operate efficiently while providing for contestability in the market for the purchase of farmers’ milk. The regime exists because there is not a competitive market for the purchase of farmers’ milk.
The regime also provides transparency of information about how Fonterra sets the farm gate milk price and gives independent processors greater confidence that the price reflects market prices for commodities and efficient costs of collecting and processing milk. Under the regime, the Commission must review Fonterra’s Milk Price Manual and the base milk price calculation each dairy season.
ends

Next in Business, Science, and Tech

New GST rules to level playing field
By: New Zealand Government
PM’s Business Advisory Council membership announced
By: New Zealand Government
Report shows New Zealand air quality is good
By: Statistics New Zealand
Govt backtracks on climate action, grants drill extension
By: Greenpeace New Zealand
Recommendations for screen sector workplace relations
By: Film Industry Working Group
DOC closing tracks to protect kauri
By: New Zealand Government
Govt raises GST threshold for online shopping
By: BusinessDesk
Foreign Website Gst Confirmation Welcomed
By: Retail NZ
Trade Me supports government’s move to collect GST
By: Trade Me Limited
GST changes will help many consumers
By: New Zealand Taxpayers' Union
Small firms say dealing with Govt ‘a nightmare’
By: New Zealand National Party
Minister welcomes major ‘air’ report
By: New Zealand Government
NZ heading for gas supply gap - OMV
By: BusinessDesk
Focus on 'low-hanging fruit' for emissions reduction
By: BusinessDesk
EPA grants OMV marine discharge application
By: Environmental Protection Authority
View as: DESKTOP | MOBILEWe're in BETA! Send Feedback © Scoop Media