The Commerce Commission today released its final report on its annual review of Fonterra’s farm gate Milk Price Manual for the 2019/20 dairy season (Manual). The final report builds on our previous reviews of the Manual.
Deputy Chair Sue Begg said Fonterra’s 2019/20 Manual remains largely consistent with the purpose of the milk price monitoring regime under the Dairy Industry Restructuring Act.
“This year we have taken a look at the amendments to the Manual made by Fonterra and matters carried forward from our previous reviews. In our view Fonterra’s amendments to defined terms in the Manual improve clarity or are minor corrections. However, we consider that clarification by Fonterra of some of the technical definitions for sales that are included in the farm gate milk price calculation would better promote the purpose of the Act,” Ms Begg said.
The Commission will review how Fonterra applies the Manual when it assesses the 2019/20 base milk price calculation at the end of the current dairy season.
The Commission’s review
Each year the Commerce Commission reviews Fonterra’s Manual for the dairy season that has just started. The Manual sets out Fonterra’s methodology for calculating its base milk price (also known as the farm gate milk price) for the season using a notional processor construct. It does not cover any other milk price within the milk supply chain.
We are required to review Fonterra’s Milk Price Manual (Manual review) at the beginning of each dairy season under the milk price monitoring regime in the Dairy Industry Restructuring Act (DIRA). Consistent with the purpose of the milk price monitoring regime, our review focuses on the extent to which the Manual provides:
- 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’).
This season the Commission has looked at the amendments to the Manual made by Fonterra and matters carried forward from our previous reviews. Matters carried forward include farmer support costs, actual foreign exchange rates, capacity of standard plants, materiality and qualifying outlier sales.
Purpose of the milk price monitoring regime
The milk price monitoring regime is intended to promote greater confidence in the consistency of Fonterra’s base milk price with contestable market outcomes.
The regime exists because, 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’.
The 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 requirements
DIRA requires the Commission to conduct two separate reviews of Fonterra’s base milk price setting each dairy season.
Fonterra’s Manual sets out its methodology for calculating its base milk price for the season using a notional processor construct. As well as the review of Fonterra’s Manual, the Commission is also required to review the base milk price calculation (calculation review).
We published our report on the 2018/19 Review of the base milk price calculation in September 2019.