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Review of base milk price released

Media Release - Commerce Commission releases review of base milk price

Issued 15 August 2013

Release No. 11

The Commerce Commission has today released its review of Fonterra’s 2012/13 base milk price calculation. This is the price Fonterra pays dairy farmers for their raw milk.

This is the second of two annual reviews the Dairy Industry Restructuring Act 2001 (DIRA) requires the Commission to undertake. The Commission completed the first review in December 2012 on Fonterra’s Milk Price Manual.

The base milk price review focusses on the Commission’s assessment of the extent to which Fonterra’s 2012/13 base milk price calculation is consistent with the purpose of the milk price monitoring regime set out in DIRA.

“The Commission specifically considered the extent to which the assumptions adopted, inputs and process used to calculate the base price provide an incentive to Fonterra to operate efficiently while providing for contestability in the market for the purchase of milk from farmers, “ said Sue Begg, Commerce Commission Deputy Chair.

“The Commission’s view is that these statutory tests are largely met,” said Ms Begg.

The Commission has identified one assumption that does not appear to be practically feasible.  This relates to the assumed energy usage rates, which rely on data generated during peak capacity utilisation and therefore do not take account of variable plant utilisation across the season.

There are also assumptions that the Commission is unable to come to a conclusion on, given the information available to it at this stage. However, having regard to the direction and potential size of the impact these assumptions might have on the base milk price calculation, the Commission does not consider them to have a significant impact on the overall conclusion.
This draft report is being provided to Fonterra for comment. In addition, the Commission welcomes feedback from other interested parties on the draft conclusions and supporting analysis in this draft report. Any comments must be provided by 5:00pm on Thursday 29 August 2013.

After considering all comments, the Commission will finalise its conclusions and publish the final report by 16 September 2013.

Background
Under section 150H of the Dairy Industry Restructuring Act 2001 (as amended July 2012) the Commission must undertake two separate reviews of Fonterra’s base milk price setting in each dairy season:

Review of Fonterra’s Farm Gate 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 draft report relates to the review of the base milk price calculation. Section 150P of the Act requires us to report on the extent to which the assumptions adopted and the inputs and process used by Fonterra in calculating its base milk price are consistent with the purpose of Subpart 5A (s 150A) of the Act (the purpose).

The assumptions adopted and the inputs and process used by Fonterra are provided in Fonterra's 'Reasons' paper for the 2012/13 base milk calculation, which is available on our website.[1]

The Commission is required to make its final report on the review of the base milk price calculation by 15 October in each year.

[1]        Fonterra, ‘Reasons’ Paper in support of Fonterra’s base milk price for the 202/13 Season, 1 July 2013, available at http://www.comcom.govt.nz/statutory-review-of-milk-price-calculation

ENDS

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