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Com Com Report on Review of Fonterra Milk Price Manual

Commerce Commission releases draft report on statutory review of Fonterra’s 2013/14 Milk Price Manual

Issued 15 October 2013, Release No. 29

The Commerce Commission has today released a draft report on its statutory review of Fonterra’s Milk Price Manual (Manual) for the 2013/14 dairy season. The Manual sets out the methodology for calculating the farm gate (base) milk price, which is the price paid by Fonterra to dairy farmers for raw milk they supply to Fonterra.

This is the first of two statutory reviews that the Commission is required to undertake each dairy season under the Dairy Industry Restructuring Act 2001 (DIRA).

DIRA requires the Commission to report on the extent to which Fonterra’s Manual is consistent with the purpose of the milk price monitoring regime. The purpose of the regime is to promote 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.

“This is the second time we have reviewed the Milk Price Manual. Our current view is that, to the extent we are able to assess it, the Manual for the 2013/14 dairy season is largely consistent with the purpose of the DIRA milk monitoring regime” said Sue Begg, Commerce Commission Deputy Chair.

“However, the changes made to the Manual since our last review, and our increased understanding of how the Manual is currently applied, have raised for us a general concern about the lack of prescription in some rules of the Manual” she said. 

Due to this lack of prescription the Commission has been unable to conclude on the extent to which two rules in the Manual for the 2013/14 dairy season are consistent with the contestability objective of the legislative purpose.

“The lack of prescription undermines transparency, which is important to the efficiency objective. It also means that we will need to consider the specific application of these rules before we can conclude on the extent to which they provide for contestability. This will form part of our second statutory review for 2013/14, which we will undertake at the end of the season,” said Ms Begg.

The Commission’s review has also found one issue from its previous reviews, regarding the treatment of stranded assets, has not been addressed by Fonterra in the 2013/14 Manual.

The Commission is seeking comments from interested parties on the draft report by 5pm on Friday 15 November 2013. After considering all comments, the Commission will finalise its conclusions and publish the final report by 16 December 2013.

You can find the draft report on the Commission’s website: http://www.comcom.govt.nz/statutory-review-of-milk-price-manual/201314-season/

Background

Under section 150H of DIRA, the Commission must undertake two separate reviews of Fonterra’s base milk price setting in each dairy season:

• Review of Fonterra’s Milk Price Manual (review of the Manual), which sets out the methodology for calculating the base milk price for the season.
• Review of Fonterra’s base milk price calculation (review of the base milk price calculation).

This draft report relates to the review of the Manual. Section 150I of DIRA requires us to report on the extent to which the Manual is consistent with the purpose of Subpart 5A (s 150A) of DIRA. Section 150A of DIRA specifies that the purpose of the milk price monitoring regime is to promote the setting of the base milk price by Fonterra:

• that provides an incentive for Fonterra to operate efficiently, while
• providing for contestability in the market for the purchase of milk from farmers.

The Commission is required to make its final report on the review of the Manual by 15 December in each year. In 2013, 15 December falls on a Sunday. Consistent with s 35(6) of the Interpretation Act 1999, we will publish our final report no later than the following business day, which is Monday 16 December 2013.

ENDS


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