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Commerce Commission Reports on Fonterra’s Milk Price Manual

Commission releases draft report on Fonterra’s 2017/18 Milk Price Manual

The Commerce Commission today released its draft report on its annual review of Fonterra’s Milk Price Manual for the 2017/18 dairy season.

The manual sets out Fonterra’ methodology for calculating the price it will pay farmers per kilogram of milk solids.

Commission Deputy Chair Sue Begg said this year’s manual is largely consistent with the purposes of the milk price monitoring regime under the Dairy Industry Restructuring Act 2001.

“The draft report builds on our previous manual reviews. We continue to encourage Fonterra to improve its public disclosures, so interested parties better understand how Fonterra interprets and applies the manual rules,” Ms Begg said.

The Commission will review how Fonterra applies the Manual when it assesses the 2017/18 base milk price calculation at the end of the current dairy season.

The Commission welcomes submissions on its draft report by 15 November 2017. The final report will be published by 15 December 2017.

The draft report and related information can be found here.


The Commission’s review

Each year the Commission reviews Fonterra’s Milk Price Manual for the dairy season that has just started (1 June 2017 to 31 May 2018).The Manual sets out Fonterra’s methodology for calculating its base milk price (also known as the farmgate milk price) for the season. It does not cover any other milk price within the milk supply chain.

There are two matters in the review, which we identified in earlier years, where we reached a different conclusion to Fonterra. These are the disclosure of the capacity of standard plans and the costs of the farmer support scheme. Although not material to our overall conclusion on the Manual, we consider them to be inconsistent with the purpose in section 150A of DIRA.

Purpose of the milk price monitoring regime

Under DIRA, the Commission has to consider the ‘efficiency’ and ‘contestability’ dimensions of the methodology used in the milk price calculation to ensure it is consistent with contestable market outcomes. The regime exists because, in the absence of a competitive market for the purchase of farmers’ milk, the milk price is set and administered by Fonterra itself.

The regime also monitors whether the price Fonterra chooses to buy milk is relative to the price that would exist if there was a competitive market for the purchase of farmers’ milk. Our report on the base milk price calculation for the 2016/17 dairy season can be found here.


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