Draft report on review of Fonterra’s base milk price milk

17 August 2015

Commission releases draft report on 2014/15 review of Fonterra’s base milk price calculation

The Commerce Commission today released its draft report on Fonterra’s base milk price calculation for the 2014/15 dairy season. The base milk price is the price Fonterra pays to farmers for raw milk and is currently set by Fonterra at $4.40 per kilogram of milk solids for the 2014/15 season.

The Commission is required to review Fonterra’s calculation of the base milk price each year as part of the Dairy Industry Restructuring Act’s (DIRA) milk price monitoring regime. The review assesses whether Fonterra’s approach delivers incentives for it to operate efficiently and provides for contestability in the market for purchasing farmers’ milk.

The Commission’s overall view is that Fonterra’s calculation of the 2014/15 base milk price is largely consistent with both the efficiency and contestability purposes of the DIRA.

Deputy Chair Sue Begg said the quality of information Fonterra provided had improved and the Commission would be encouraging it to continue making its calculations more accessible to the broader dairy industry.

“Fonterra has made a significant effort to improve the transparency of its calculations and we have now resolved some outstanding issues from last year. Most notably we can conclude its assumed energy and fixed asset costs are consistent with the purpose of the regime,” Ms Begg said.

The Commission has worked constructively this year with Fonterra, independent processors and market analysts to improve the understanding of individual revenue and cost components making up the base milk price.

“At this stage we don’t yet have enough information to compare the notional producer’s individual component costs with independent processors’ views of those costs, but we are proposing this be a focus for next year’s review,” Ms Begg said.

The Commission welcomes comments on the draft report by 1 September 2015. The final report will be published by 15 September 2015.

The draft report and related information can be found here.

An infographic illustrating what the notional producer’s business looks like for the purpose of calculating Fonterra’s base milk price can be found here.

The Commission’s draft report only covers the base milk price calculation for the 2014/15 season, not the forecast 2015/16 price of $3.85 that Fonterra recently announced.

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