Statutory review of Fonterra’s milk price manual

Media Release
Issued 14 December 2012
Release No. 50

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

The Commerce Commission has today released a final 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 an incentive to Fonterra to operate efficiently while providing for contestability in the market for the purchase of milk from farmers.

“Our conclusion is that, to the extent we are able to assess it, Fonterra’s manual is not
inconsistent with the purpose of the DIRA milk monitoring regime. There are a couple of elements that we consider are not fully consistent with the efficiency aspect of the purpose, but they only have a minor impact,” said Sue Begg, Commerce Commission Deputy Chair.

Ms Begg said there were a number of caveats to the Commission’s conclusion.

“In particular there are three matters about which we are unable to form a view in our report, and which we consider to be potentially material,” she said. “We will examine these matters again in our second, separate but related, review in September 2013. In that review we will look at how Fonterra has applied the milk price manual to calculate the milk price.”

The three matters of potential concern are the regions where plants are assumed to be added, the calculation of milk collection costs, and the treatment of assets that are no longer required.”

“There are also other matters about which the manual is not specific. We will not be able to form a view on these until the September review.”

“Parts of Fonterra’s milk price manual states general principles or high level rules. While these are not in themselves inconsistent with the purpose, they could be implemented in a manner that is,” said Ms Begg.”

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

Background

Under section 150H of the Dairy 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-ondry-
run-review-of-fonterra-s-farm-gate-milk-price
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