Commission Releases Final Report On Fonterra's 2021/22 Milk Price Manual

The Commerce Commission today published its final report on its annual review of Fonterra’s Milk Price Manual for the 2021/22 dairy season.

There is not enough depth in the market for milk supplied to processors in New Zealand to establish a New Zealand-wide ‘market price’ that is independent of the price paid by Fonterra. For this reason, Fonterra’s Milk Price Manual describes the methodology Fonterra uses to calculate its base milk price – the amount farmers receive from Fonterra for each kilogram of milk solids in a dairy season.

The milk price monitoring regime is intended to promote greater confidence in the consistency of Fonterra’s base milk price with contestable market outcomes. Without a competitive market for the purchase of farmers’ milk, the milk price is set by Fonterra using an administrative methodology. As Fonterra determines and applies that methodology itself, there is a risk that Fonterra might have the incentive and ability to set a base milk price that is inefficient.

The Commission is satisfied Fonterra’s 2021/22 Manual is consistent with both the efficiency and contestability dimensions of the purpose of the base milk price monitoring regime with the exception of the rule for the asset beta.

The asset beta is a component of the estimated cost of capital of financing the operations of a ‘notional’ milk processor and reflects the extent to which these operations are more or less risky than the stock market as a whole. A higher asset beta would put downward pressure on the base milk price Fonterra pays its farmers. This year’s review focused on how recent amendments to the Dairy Industry Restructuring Act (DIRA), which came into force on 1 June 2021, mean Fonterra’s discretion in estimating the asset beta has been reduced. The Commission has commented on the reasons why the rule is inconsistent with DIRA.

Submissions on the draft report released were received from Fonterra, Miraka, and Open Country Dairy and were considered as part of this review. The findings of the final report are unchanged from those in the draft report released in October.

The Commission will review how Fonterra applies the Manual when it assesses the 2021/22 base milk price calculation at the end of the current dairy season.

The final report and related information can be found here.

Background

The Commission’s review
Each year the Commerce Commission reviews Fonterra’s Base Milk Price Manual for the dairy season that has just started. Consistent with the purpose of the milk price monitoring regime, our review focuses on the extent to which the Manual provides:

• an incentive for Fonterra to operate efficiently (the ‘efficiency dimension’)
• for contestability in the market for the purchase of milk from farmers (the ‘contestability dimension’)

The regime also monitors whether the price Fonterra sets might be ‘too high’ or ‘too low’ relative to the price that would exist if the market for purchasing farmers’ milk was contestable.

DIRA review requirements

Under DIRA, the Commission is required to review Fonterra’s Manual, which sets out Fonterra’s methodology for calculating its base milk price at the start of each dairy season.

The legislation also requires the Commission to review the base milk price calculation at the end of each season. The Commission will next review how Fonterra applies the Manual when it assesses the 2021/22 base milk price calculation.

© Scoop Media