The Commerce Commission has welcomed a High Court judgment, published today, which dismisses a judicial review challenge by Open Country Dairy Limited (OCD) to the Commission’s report into Fonterra’s base milk price calculation for 2017/18.
The Commission’s report had been published in September 2018 as part of its functions under the Dairy Industry Restructuring Act 2001 (DIR Act). At the end of each dairy season, the Commission is required to publicly report on Fonterra’s processes for calculating the base milk price (BMP), which is the average price Fonterra pays to farmers per kilogram of milk solids. The report assesses the extent to which the BMP calculation provides incentives for Fonterra to operate efficiently and is consistent with contestability in the market for purchasing farmers’ milk.
OCD brought judicial review proceedings in January 2019. It challenged the way that the Commission had reported its finding on the asset beta used by Fonterra in its BMP calculation, as well as its acceptance of the use by Fonterra of prices from sales of product which had not been transacted on the Global Dairy Transactions platform (known as ‘off-GDT sales’).
Commission Deputy Chair, Sue Begg, noted that the Court had assessed in considerable detail the approach taken by the Commission in preparing its report into the BMP calculation.
“The Court has confirmed that our approach is consistent with our statutory obligations. The outcome reflects the work done by the Commission over several years in preparing and refining the framework for our reviews under the DIR Act”, Ms Begg said.
The full text of the judgment is available on the Commission’s website.
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 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 the extent to which the base milk price calculation provides an incentive for Fonterra to operate efficiently and the extent to which it provides for contestability in the market for the purchasing of farmers’ milk.
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 efficient and 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 entry by efficient processors. The regime therefore is intended to promote a base milk price that is not 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 related to 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 after the start of the season. Fonterra’s Manual sets out its methodology for calculating its base milk price for the season.