Commission Releases Final Report On Fonterra’s 2021/22 Milk Price Manual

The Commerce Commission today published its final report
on its annual review of Fonterra’s Milk Price Manual for
the 2021/22 dairy season.

There is not enough depth in
the market for milk supplied to processors in New Zealand to
establish a New Zealand-wide ‘market price’ that is
independent of the price paid by Fonterra. For this reason,
Fonterra’s Milk Price Manual describes the methodology
Fonterra uses to calculate its base milk price – the
amount farmers receive from Fonterra for each kilogram of
milk solids in a dairy season.

The milk price
monitoring regime is intended to promote greater confidence
in the consistency of Fonterra’s base milk price with
contestable market outcomes. Without a competitive market
for the purchase of farmers’ milk, the milk price is set
by Fonterra using an administrative methodology. As Fonterra
determines and applies that methodology itself, there is a
risk that Fonterra might have the incentive and ability to
set a base milk price that is inefficient.

Commission is satisfied Fonterra’s 2021/22 Manual is
consistent with both the efficiency and contestability
dimensions of the purpose of the base milk price monitoring
regime with the exception of the rule for the asset

The asset beta is a component of the estimated
cost of capital of financing the operations of a
‘notional’ milk processor and reflects the extent to
which these operations are more or less risky than the stock
market as a whole. A higher asset beta would put downward
pressure on the base milk price Fonterra pays its farmers.
This year’s review focused on how recent amendments to the
Dairy Industry Restructuring Act (DIRA), which came into
force on 1 June 2021, mean Fonterra’s discretion in
estimating the asset beta has been reduced. The Commission
has commented on the reasons why the rule is inconsistent
with DIRA.

Submissions on the draft report released
were received from Fonterra, Miraka, and Open Country Dairy
and were considered as part of this review. The findings of
the final report are unchanged from those in the draft
report released in October.

The Commission will review
how Fonterra applies the Manual when it assesses the 2021/22
base milk price calculation at the end of the current dairy

The final report and related information can
be found here.


Commission’s review

Each year the Commerce
Commission reviews Fonterra’s Base Milk Price Manual for
the dairy season that has just started. Consistent with the
purpose of the milk price monitoring regime, our review
focuses on the extent to which the Manual

  • an incentive for Fonterra to operate
    efficiently (the ‘efficiency dimension’)
  • for
    contestability in the market for the purchase of milk from
    farmers (the ‘contestability dimension’)

regime also monitors whether the price Fonterra sets might
be ‘too high’ or ‘too low’ relative to the price
that would exist if the market for purchasing farmers’
milk was contestable.

DIRA review

Under DIRA, the Commission is required
to review Fonterra’s Manual, which sets out Fonterra’s
methodology for calculating its base milk price at the start
of each dairy season.

The legislation also requires
the Commission to review the base milk price calculation at
the end of each season. The Commission will next review how
Fonterra applies the Manual when it assesses the 2021/22
base milk price

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