Commission begins process for the 2013/14 review of Fonterra's milk price calcul…

The Commerce Commission today released a paper outlining the proposed process and timeline for a review of Fonterra’s base milk price calculation for the 2013/14 dairy season. The base milk price is what Fonterra pays the farmers who supply them milk.

The Commission is required to review Fonterra’s calculation of the base milk price each year and 2013/14 is the second time the Commission will undertake a calculation review. The review will assess the extent to which Fonterra’s approach provides incentives for it to operate efficiently while providing for contestability in the market for purchasing farmers’ milk. The scope of the review is to only look at the base milk price, not the retail price that consumers pay for milk.

The Commission is proposing to build on last year’s review by focusing its analysis this year on the issues outstanding from previous reviews and any areas where Fonterra has changed its approach.

“The big change for this year’s review is that Fonterra is proposing to pay less than the milk price calculated under the 2013/14 Milk Price Manual,” said Commerce Commission Deputy Chair Sue Begg.

“Our assessment approach may differ from last year as a result, but we haven’t formed any view yet. We will reach a view once Fonterra provides us with its statutory information on 1 July 2014 and we will also seek the views of interested parties at that time,” said Ms Begg.

The Commission welcomes comments on the process outlined in the paper by Friday 20 June 2014. The draft report will be issued by 15 August 2014, with the final report expected by 15 September 2014.

The process paper can be found on the Review of Milk Price Calculation 2013/14 season page.

Background

Under section 150H of the Dairy Industry Restructuring Act 2001 (as amended July 2012) the Commission must undertake two separate reviews of how Fonterra sets its base milk price each dairy season.

• A review of Fonterra’s farm gate milk price manual, which sets out the methodology for calculating the base milk price for the season.
• A review of Fonterra’s base milk price calculation.

The Commission proposes to focus its 2013/14 review on the issues listed in Table 2 of the process paper.

Fonterra has publicly stated that it is proposing to pay less than the milk price calculated in accordance with the 2013/14 Milk Price Manual (Fonterra media release “Fonterra announces forecast Farmgate Milk Price for 2014/15 season and revised forecast for 2013/14 season” – 28 May 2014).

The Commission’s approach may change based on the outcome of its assessment of Fonterra’s assumptions adopted, inputs and process in determining a milk price that is expected to be less than the milk price derived under the Manual.