Commission releases final report on Fonterra

Commission releases final report on Fonterra’s 2015/16 Milk Price Manual

The Commerce Commission today released its final report on its statutory review of Fonterra’s Milk Price Manual for the 2015/16 dairy season. The Manual sets out how Fonterra will calculate how much it will pay dairy farmers for raw milk.

Under the Dairy Industry Restructuring Act 2001 the Commission is required to report annually on the extent to which the Manual promotes the setting of a base milk price that provides incentives for Fonterra to operate efficiently, while providing for contestability in the market for the purchase of milk from farmers.

Deputy Chair Sue Begg said having considered submissions on the draft report released in October, the Commission remains of the view that the 2015/16 Manual is largely consistent with the purpose of the milk price monitoring regime under the Act.

“Overall we are pleased with the steps Fonterra has taken to improve the Manual’s consistency with the overall purpose of the regime. We will continue to encourage Fonterra to keep improving the clarity of information on the rules and how it interprets and applies them,” Ms Begg said.

The Commission will further review how Fonterra applies the Manual when it assesses the 2015/16 base milk price calculation at the end of the current dairy season.

“There are a number of issues we will be following up in our review of the base milk price calculation next year, including questions raised by interested parties about the cost of capital calculation Fonterra uses to set the capital charge. We are also recommending that Fonterra considers how the cost of support payments, such as its interest-free loans to farmers, is taken into account in the milk price calculation,” Ms Begg said.

The final report and related information can be found on the project page.

Background
What does the Commission’s review of the Manual look at?
Each year the Commission reviews Fonterra’s Milk Price Manual for the dairy season that has just started. The Manual sets out Fonterra’s methodology for calculating its base milk price (also known as the farm gate milk price) for the season.

The Manual does not cover any other milk price within the milk supply chain.

We are required to consider the ‘efficiency’ and ‘contestability’ dimensions when reviewing Fonterra’s methodology for calculating the base milk price. Our review focuses on whether the Manual provides:
• an incentive for Fonterra to operate efficiently (the ‘efficiency dimension’)
• contestability in the market for the purchase of milk from farmers (the ‘contestability dimension’).
Policy objectives of the milk price monitoring regime
The milk price monitoring regime is intended to promote greater transparency of Fonterra’s base milk price setting processes, and greater confidence in the consistency of Fonterra’s base milk price with contestable market outcomes. The regime monitors whether the base milk price that Fonterra chooses to set provides incentives for Fonterra to operate efficiently but does not preclude efficient processors from potentially competing.

What does the overall monitoring regime consist of?
The Act requires us to do two separate reviews of Fonterra’s base milk price setting each dairy season.
• The Manual review considers Fonterra’s methodology for calculating its base milk price at the beginning of each dairy season
• The Calculation review considers Fonterra’s base milk price calculation at the end of each dairy season.
We published our 2014/15 Review of the base milk price calculation in September 2015. In that report, we concluded that Fonterra’s 2014/15 base milk price calculation was largely consistent with the purpose of the milk price monitoring regime.

ENDS

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