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Draft Determinations On Raw Milk Regulations

Commerce Commission Draft Determinations On Raw Milk Regulations

Fonterra Cooperative Group Ltd today expressed concern at the likely impact on domestic milk market competition if the Commerce Commission's two first draft determinations under the Raw Milk Regulations are accepted.

The first determination concerns North Island Independent Dairy Producers.

Fonterra General Counsel David Matthews said Fonterra continued to supply IDP with milk during 2002 at a time when the privately owned company had defaulted on its debts.

Milk was supplied to IDP at a premium to the Default Milk Price - an annually determined variable price mechanism defined in the Raw Milk Regulations.

Mr Matthews said that under an arrangement worked out with IDP, the price charged reflected the additional commercial risk that Fonterra was accepting by continuing to supply the company when it was in financial distress.

The Commerce Commission accepted that Fonterra was entitled to refuse supply to IDP. If supply had been stopped, it was likely IDP would have ceased trading altogether.

Fonterra received the draft determination this afternoon and is currently studying its implications before determining whether to make further submissions to the Commerce Commission prior to the release of a final determination, but is concerned of the implications of the draft determination if it is not overturned, said Mr Matthews.

The second determination concerns the discount rate applied to set the default milk price.

The issue relates to the setting of the default milk price for raw milk processors who purchased raw milk from Fonterra during the 2001/2002 season. The Commerce Commission's requirement to produce a draft determination relating to the annualised share value is a highly technical, one-off situation that has occurred as a result of the merger, and will only apply to the 2001/2002 season.

The default milk price is set from a prescribed statutory formula that includes a discount rate for calculating Fonterra's annualised share value. From the 2002/2003 season onwards, the discount rate is set from the cost of capital used to calculate Fonterra's share price, however, in the 2001/2002 season, it did not set a share price as this had already been set by the co-operative companies prior to the merger.

The Raw Milk Regulations provide that where Fonterra does not use a cost of capital rate in calculating its share price, the Commission must set a discount rate. The rate used by Standard and Poors in the 2002/2003 season was 8.25 per cent. This is the rate that will be used to determine the default milk price from 1 June 2002 for the current season and the same methodology will be used to derive this rate in the future.

After taking appropriate external advice from international experts, Fonterra believes that the same methodology should have been applied and that the discount rate for the 2001/2002 season should have been 8.25 per cent. In the Commission's draft determination, it has taken a different approach to establishing what the discount rate should be.

Mr Matthews said that given the technicality of the issue, Fonterra would be closely analysing the Commission's draft determination and be making an appropriate submission.

The draft determination has no impact on the calculation of Fonterra's share price.

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