Commission Releases Final Report On Fonterra’s Milk Price

The Commerce Commission has today released its final report on Fonterra’s base milk price calculation for the 2019/20 dairy season.

The base milk price is the average price Fonterra sets for raw milk supplied by farmers, which is currently forecast to be $7.10 - $7.20 per kilogram of milk solids for the 2019/20 dairy season.

The Commission is required to review the calculation at the end of each dairy season under the milk price monitoring regime in the Dairy Industry Restructuring Act (DIRA). The regime is designed to provide Fonterra with incentives to set the base milk price consistent with efficient and contestable market outcomes.

“We are satisfied Fonterra’s calculation is largely consistent with both the efficiency and contestability purposes of the Act,” Commission Deputy Chair Sue Begg said.

“Our review this year focused on Fonterra’s administrative and overhead costs, as well as the range of commodity products manufactured and sold, and revealed no new areas of concern.”

The Commission remains of the view that Fonterra’s current estimate of “asset beta” – the extent to which the assets associated with processing milk are more or less risky than the stock market as a whole – is unlikely to be practically feasible for an efficient processor. Fonterra is scheduled to review its estimate for the asset beta for the 2020/21 season, which will likely be a focus for next year’s report.

The final report and related information can be found here.

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