Commission updates framework for reviewing Fonterra’s milk price calculation

The Commerce Commission has updated its approach paper outlining the framework it applies when reviewing both how Fonterra sets its annual base milk price and the Milk Price Manual used to set the base milk price.

The update takes into account changes to the Dairy Industry Restructuring Act (DIRA) that came into effect in June.

The Act requires the Commission to conduct two separate reviews of Fonterra’s base milk price setting each dairy season. At the start of each season, the Commission reviews Fonterra’s methodology for calculating its base milk price, as set out in Fonterra’s Farmgate Milk Price Manual. The legislation also requires the Commission to review the base milk price calculation at the end of each season.

The base milk price is the price Fonterra sets for raw milk it purchases from farmers. An independent Milk Price Panel established under DIRA calculates the base milk price using rules set out in the Milk Price Manual and makes a recommendation to Fonterra. This becomes the base milk price once it is approved by Fonterra’s Board.

The regulatory regime is designed to ensure Fonterra pays a high enough price for farmers’ milk that it has to operate efficiently but that is not too high that it will prevent new and potentially more efficient processors from entering the market and buying milk from farmers.

The specific changes to the Commission’s approach paper compared to the previous version published in 2017 are:

  • updates to reflect new requirements under Section 150(C) of DIRA on how the revenues and costs (including capital costs and a return on capital) are determined in calculating the base milk price
  • updates to reflect changes to Fonterra’s governance and external reviews supporting the base milk price calculation
  • further clarity on the operational materiality the Commission uses in selecting focus areas for each year’s review
  • additional details on how the base milk price is defined and set.

None of the revisions to the Commission’s framework for reviewing Fonterra’s milk price calculation are as a result of, or related to, Fonterra’s capital restructure proposal.

The paper detailing the Commission’s approach is on its website.

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