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ComCom wants more transparency about Fonterra

ComCom wants more transparency about Fonterra's processing capacity

By Rebecca Howard

Oct. 15 (BusinessDesk) - The Commerce Commission is concerned Fonterra Cooperative Group's plans to mothball processing plants are too opaque.

The commission reviews the milk price manual at the start of each season to make sure Fonterra is calculating its farmgate milk price in line with the regulatory regime. Among the issues it identified in the draft review of the 2018/19 manual, the regulator said it wants greater transparency about mothballing decisions that will affect the milk price calculation.

That's of particular concern to independent processors because unanticipated mothballing decisions can create milk price volatility.

"An appropriate place to publicly disclose mothballing decisions as part of the milk price calculation may be in the Global Dairy updates each month where collected volumes are disclosed each month," the commission said.

The regulatory framework is based on assumptions about the economics of a notional processor in order to gauge whether Fonterra operates efficiently and allows a contestable market.

In the past two seasons, Fonterra's milk price calculations assumed mothballing some plans due to the reduced milk collection, rather than permanently closing them.

The question of mothballing rather than permanently closing plant also raises a key question in the draft review about whether Fonterra provides enough compensation for the risk of permanently stranded assets.

Fonterra's shareholders carry the risk if a plant closes due to lower supply, whereas Fonterra can deduct unrecovered costs from the milk price if mothballing stems from changes to the group of products used to set the milk price. There is no adjustment when a plant is stranded due to overcapacity.

The regulator notes that an efficient, competing independent processor would face different asset stranding risks when competing with a single or much smaller number of processing plants than Fonterra.

“An allowance for stranding based on the remaining book value of an old Fonterra plant seems intuitively to understate the asset stranding risk to an efficient processor building a new plant,” it said.

Writing off a newer plant, with a higher book value, would have a more significant impact, the regulator said.

The regulator's draft view is that the manual's approach to asset stranding falls within allowable 'safe harbour' provisions, even if they do underestimate the risk a new entrant may face.

The Commerce Commission's draft report is open for submissions until Nov. 16.

The final report is expected to be published by Dec. 14.


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