Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 

Review of Fonterra’s base milk price calculation

Final report on review of Fonterra’s 2017/18 base milk price calculation


The Commerce Commission has released its final report on Fonterra’s base milk price calculation for the 2017/18 dairy season.

The base milk price is the average price that Fonterra pays farmers for raw milk, which was set at $6.69 per kilogram of milk solids for the 2017/18 dairy season. The report does not cover Fonterra’s forecast price of $6.75 for the 2018/19 dairy season.

Deputy Chair Sue Begg said no issues had been raised in submissions to the Commission’s draft reportthat warranted a change in the conclusions.

“We remain satisfied that Fonterra’s calculation of the 2017/18 base milk price is largely consistent with both the efficiency and contestability purposes of the Act. We further remain of the view that the asset beta that Fonterra applies is unlikely to be practically feasible,” Ms Begg said.

The final report and related information can be found here.

Background
The Commission is required to review Fonterra’s calculation at the end of each dairy season under the milk price monitoring regime in the Dairy Industry Restructuring Act (DIRA).

Asset beta
The asset beta is used in calculating the estimated cost of capital of financing milk processing operations, and in turn affects the milk price Fonterra pays its farmers. It reflects the extent to which the assets associated with processing milk are more or less risky than the stock market as a whole. A higher asset beta would put downward pressure on the milk price Fonterra pays its farmers.

The Commission’s review
Each year the Commission reviews and publishes a report on the calculation of the base milk price for the dairy season that has just concluded. The base milk price is the average price Fonterra pays to farmers per kilogram of milk solids (kgMS). The focus of the review is solely on the farm gate milk price and not any other milk price within the milk supply chain. In the review, the Commission is required to consider whether the base milk price calculation provides an incentive for Fonterra to operate efficiently and if it is consistent with contestability in the market for purchasing farmers’ milk.

Purpose of the milk price monitoring regime
The milk price monitoring regime is intended to promote greater transparency of Fonterra’s base milk price setting processes, and greater confidence in the consistency of Fonterra’s base milk price with contestable market outcomes. The regime exists because there is not yet a competitive domestic market for the purchase of farmers’ milk and the milk price is therefore set by Fonterra using an ‘administrative’ methodology. As Fonterra determines and applies that methodology itself, there is a risk that it might set a base milk price that is ‘inefficient’ - either too high or too low relative to what it would be in a competitive market. A price that is too high could act as a barrier to efficient entry by processors. The regime therefore also monitors whether the base milk price Fonterra sets might be too high relative to the price that would exist if the market for purchasing farmers’ milk was contestable.

DIRA review requirements
DIRA requires the Commission to conduct two separate reviews of Fonterra’s base milk price setting each dairy season. As well as the review of the base milk price calculation at the end of each season, the Commission is also required to review Fonterra’s Farmgate Milk Price Manual (Manual review) after the start of the season. Fonterra’s Manual sets out its methodology for calculating its base milk price for the season.

ends

© Scoop Media

 
 
 
Business Headlines | Sci-Tech Headlines

 

Tourism: Employers Welcome Back Working Holidaymakers

Tourism businesses gearing up for the return of Australian visitors from next week will be relieved to learn that they will also have access to an offshore pool of much-needed job candidates, Tourism Industry Aotearoa says. Tourism employers around ... More>>

Commerce Commission: Latest Broadband Report Confirms Improved Performance Of Premium Fibre Plans

The latest report from the Commerce Commission’s Measuring Broadband New Zealand programme shows that the performance of Fibre Max plans has improved substantially. This follows a collaboration between the Commission, its independent testing partner, ... More>>

Air New Zealand: Capital Raise Deferred

Air New Zealand has decided to defer its planned capital raise to later in 2021 allowing more time to assess the impacts of recent developments on the airline’s path to recovery. 'We’ve seen some clearing of COVID-19 clouds recently, with ... More>>

Commerce Commission: Cartel Conduct Now Punishable By Up To 7 Years’ Jail Time

Cartel conduct can now be punished with a term of imprisonment of up to 7 years, after the Commerce (Criminalisation of Cartels) Amendment Act 2019 came into effect today. Cartel conduct includes price fixing, market allocation and bid rigging (see ... More>>

Stats NZ: New Report Shows Impact Of Demands On Land In New Zealand

A new environmental report released today by the Ministry for the Environment and Stats NZ, presents new data on New Zealand’s land cover, soil quality, and land fragmentation. The land cover data in the report, Our land 2021 , provides the most ... More>>

ALSO:

Stats NZ: March Card Spending Rebounds Despite COVID

There was a lift in retail card spending in March following a fall in the lockdown-disrupted February month, Stats NZ said today. Seasonally adjusted retail card spending rose by $53 million (0.9 percent), compared with February 2021. Visit our website to read ... More>>

PwC: Outcome Of Review Into Air New Zealand Gas Turbines Business

Air New Zealand has received the report into its Gas Turbines business from independent external advisers PwC. Air New Zealand Chairman Dame Therese Walsh says the report identified a range of effective controls in the Gas Turbines revenue contracting ... More>>