Commerce Commission releases review of base milk price

The Commerce Commission has today released its review of Fonterra’s 2012/13 base milk price calculation. This is the price Fonterra pays dairy farmers for their raw milk.

This is the second of two annual reviews the Dairy Industry Restructuring Act 2001 (DIRA) requires the Commission to undertake. The Commission completed the first review in December 2012 on Fonterra’s Milk Price Manual.

The base milk price review focusses on the Commission’s assessment of the extent to which Fonterra’s 2012/13 base milk price calculation is consistent with the purpose of the milk price monitoring regime set out in DIRA.

“The Commission specifically considered the extent to which the assumptions adopted, inputs and process used to calculate the base price provide an incentive to Fonterra to operate efficiently while providing for contestability in the market for the purchase of milk from farmers, “ said Sue Begg, Commerce Commission Deputy Chair.

“The Commission’s view is that these statutory tests are largely met,” said Ms Begg.

The Commission has identified one assumption that does not appear to be practically feasible.  This relates to the assumed energy usage rates, which rely on data generated during peak capacity utilisation and therefore do not take account of variable plant utilisation across the season.

There are also assumptions that the Commission is unable to come to a conclusion on, given the information available to it at this stage. However, having regard to the direction and potential size of the impact these assumptions might have on the base milk price calculation, the Commission does not consider them to have a significant impact on the overall conclusion.

This draft report is being provided to Fonterra for comment. In addition, the Commission welcomes feedback from other interested parties on the draft conclusions and supporting analysis in this draft report. Any comments must be provided by 5:00pm on Thursday 29 August 2013.

After considering all comments, the Commission will finalise its conclusions and publish the final report by 16 September 2013.