Dry run review of Fonterra’s farm gate milk price

Final report on dry run review of Fonterra’s farm gate milk price released

The Commerce Commission has today released its final report on the dry run review of how Fonterra sets its farm gate milk price.

The Commission undertook this non-statutory dry run review at the request of the Minister for Primary Industries to show how the Government’s new milk price monitoring regime would work in practice.

“The timeframe for carrying out the dry run review was compressed as the Minister wanted it completed before Fonterra’s planned move to Trading Among Farmers (TAF). I’m pleased we were able to meet that deadline and help to provide some clarity over the future regulatory environment for the New Zealand dairy industry,” said Sue Begg, Commerce Commission Deputy Chair.

“Following our consideration of submissions from interested parties and our own analysis, our conclusion is that Fonterra’s setting of the farm gate milk price is not inconsistent with the purpose and principles of the milk price regime set out in the amended Dairy Industry Restructuring Act,” said Ms Begg.

The review was started using the exposure draft of the amendments to the Dairy Industry Restructuring Act (DIRA) proposed in January 2012, but was completed after the amendments to DIRA were passed by Parliament in July 2012. The final amended legislation included a number of changes from the January 2012 proposals.

Under the milk monitoring regime established in the amended DIRA, the Commission will monitor and report on the extent to which Fonterra’s setting of the farm gate milk price is consistent with the purpose and principles of the newly amended legislation.

“As we initially concluded in our draft report in May, Fonterra’s farm gate milk price does provide for contestability in the farm gate milk market, as overall the assumptions Fonterra used in setting the price are practically feasible for an efficient processor. The assumptions also provide incentives for Fonterra to operate efficiently,” said Ms Begg.

Fonterra retains significant discretion over how the farm gate milk price is set. The monitoring regime cannot provide certainty over how the farm gate milk price will be set or that it will not change over time. However, the monitoring regime will make Fonterra’s process and calculations more transparent.

You can find the final report on the Commission's website here www.comcom.govt.nz/review-of-fonterra-s-farm-gate-milk-price

Background

What is the ‘farm gate milk price’?
The farm gate milk price is the price that Fonterra pays dairy farmers for their raw milk and is worked out using a pricing methodology set by Fonterra. The amended DIRA and the dry run review are only concerned with Fonterra’s farm gate milk price, not the retail price for milk.

Why have we conducted this dry run review?
Prior to the amendments to the DIRA being passed into law, the Minister for Primary Industries requested that the Commission conduct a non-statutory dry run review of Fonterra’s 2011/12 methodology for setting the farm gate milk price and Fonterra’s application of that methodology.

The purpose of the dry run review was to inform potential TAF investors of how the milk price monitoring regime would work in practice.

What was involved in the dry run review?
During the dry run review, the Commission focused on a limited number of key issues in considering Fonterra’s milk price manual and its farm gate milk price calculation. In respect of those issues, we examined the extent to which Fonterra’s setting of the farm gate milk price should provide incentives for Fonterra to operate efficiently, while providing for contestability in the market for farmers’ raw milk. We issued our draft report in May 2012 and invited submissions on it. After considering all submissions, we issued the final report.

What are the limitations of the dry run review?
The dry run review, and the conclusions the Commission has drawn from it, are limited in a number of respects, including that we have focused on a targeted number of key issues.

We have identified areas where we consider that the clarity and content of Fonterra’s milk price manual can be improved.
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