Fonterra Milk Pricing Method Approved

ANALYSIS - An inquiry into how Fonterra sets its farmgate milk price is now complete, concluding that Fonterra sets its farm gate milk price in line with new amendments to industry legislation, writes Charlotte Johnston, TheCattleSite editor.
calendar icon 30 August 2012
clock icon 3 minute read

Following on from changes to the Dairy Industry Restructuring Act (DIRA), Primary Industries Minister David Carter asked the Commerce Commission to undertake a non-statutory "dry run" review to demonstrate how the the Government's new milk price monitoring regime would work in practice.

Looking only at the farmgate milk price, Mr Carter requested the review be complete before Fonterra's move to Trading Among Farmers.

Fonterra controls 89 per cent of the raw milk market in New Zealand.

“Because of Fonterra’s dominance in the New Zealand market, the price it pays its farmers for milk at the farm gate effectively becomes the default price that all dairy processors must pay to attract supply from farmers,” said Mr Carter.

“The Dairy Industry Restructuring Amendment will oversee how Fonterra sets the price it pays its farmers, thereby ensuring a competitive and innovative dairy industry."

The regulatory regime for establishing a milk pricing benchmark regime is essential to encouraging domestic competition for Fonterra, and the dry run review process saw submissions from a range of independent processors who have argued Fonterra is able to set the farmgate milk price to suit its commercial needs best.

Trading Among Farmers (TAF) will allow farmers to buy and sell shares from each other through a market, rather than the Co-operative.

“Following our consideration of submissions from interested parties and our own analysis, our conclusion is that Fonterra’s setting of the farm gate milk price is not inconsistent with the purpose and principles of the milk price regime set out in the amended Dairy Industry Restructuring Act,” said Ms Begg.

“As we initially concluded in our draft report in May, Fonterra’s farm gate milk price does provide for contestability in the farm gate milk market, as overall the assumptions Fonterra used in setting the price are practically feasible for an efficient processor. The assumptions also provide incentives for Fonterra to operate efficiently,” said Ms Begg.

Fonterra retains significant discretion over how the farm gate milk price is set. The monitoring regime cannot provide certainty over how the farm gate milk price will be set or that it will not change over time. However, the monitoring regime will make Fonterra’s process and calculations more transparent.

Fonterra Chief Financial Officer Jonathan Mason said: “Fonterra has satisfied all 13 of the key drivers for the Farmgate Milk Price reviewed under the statutory testing. The dry run noted a minor issue relating to the calculated cost of capital and this has been addressed for the current season.”

Mr Mason noted that the Commission’s assessment provides a solid basis for confidence that our shareholders, the New Zealand public and wider stakeholders can have in the integrity of the Farmgate Milk Price.

“This outcome also provides a sound foundation for full reviews the Commerce Commission will undertake over the next 12 months and beyond,” he says.

Trading Among Farmers

DIRA was created to allow Fonterra to establish its Trading Among Farmers system, which will allow farmers to buy and sell shares from each other through a market, rather than the Co-operative. This will allow those who are not invested in Fonterra to buy into the Co-operative and current members to sell shares, removing the need for Fonterra to pay cash out to those farmers leaving or reducing milk supply.

A major industry concern about TAF has been the tension expected to result between the price Fonterra pays its farmers for milk and the size of the dividend that will be expected by investors.

Fonterra is looking at launching TAF in November - dependent on market conditions.

Charlotte Johnston, Editor

Charlotte Johnston - Editor

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