Commission final report on Fonterra’s milk price manual

Commission releases final report on Fonterra’s milk price manual

Issued 16 December 2013, Release No. 56

The Commerce Commission has today released its final report on its 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).

The Commission has concluded the 2013/14 Milk Price Manual is largely consistent with the purpose of the DIRA milk monitoring regime. 

However the Commission notes that the lack of prescription in some rules in the manual reduces transparency, which is important to the efficiency objective. The lack of prescription has also resulted in the Commission being 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 Commission will consider the specific application of the rules during the second statutory review at the end of the season.

During the consultation process, Fonterra provided additional clarification in respect of one issue from the Commission’s previous reviews, regarding the treatment of stranded assets, that had not been addressed by Fonterra in the 2013/14 Manual.

The Commission notes Fonterra’s 11 December announcement of a forecast farm gate Milk Price for 2013/2014 which is less than that calculated under the Milk Price Manual.

"It’s the Commission's view that Fonterra's decision doesn't affect our review of the milk price manual. However, we will consider the implications of any deviation from the Milk Price Panel's recommendations for the base milk price when we review how the milk price manual is applied to set the milk price. That is the second review we have to undertake by 15 September 2014," said Commerce Commission Deputy Chair Sue Begg. 

You can find the final report on our Review of Milk Price Manual 2013/14 Season page.

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 final 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 have published our final report no later than the following business day, which is Monday 16 December 2013.

ENDS

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