Commerce Commission concludes review of the 2012/13 base milk price
The Commerce Commission has today released its final report on the review of Fonterra’s 2012/13 base milk price calculation. This is the price Fonterra pays dairy farmers for their raw milk.
The Commission is required to report on the extent to which Fonterra’s 2012/13 base milk price setting process is consistent with the purpose of the milk price monitoring regime set out in the Dairy Industry Restructuring Act 2001.
The purpose of the milk price monitoring regime is to provide an incentive to Fonterra to operate efficiently, while providing for contestability in the market for the purchase of milk from farmers.
“Our review is focused on the assumptions, inputs and processes of the base milk price setting process rather than the outcome of the calculation, ie, the base milk price itself” said Sue Begg, Commerce Commission Deputy Chair.
“Having considered the views of submitters on our draft report, our conclusion is still that these statutory tests are largely met,” said Ms Begg.
The Commission has identified one assumption that does not appear to be consistent with the contestability dimension of the statutory purpose. There are also two assumptions that the Commission is unable to come to a conclusion on, given the information available to it.
However, having regard to the direction and potential size of the impact these three assumptions might have on the base milk price calculation, the Commission does not consider them as likely to have a significant impact on the overall conclusion.
“We will review the assumptions, inputs and processes that underpin Fonterra’s base milk price calculation again next year, when we consider Fonterra’s 2013/14 base milk price setting process. In the meantime, our review of Fonterra’s Milk Price Manual for the 2013/14 dairy season is already underway, with the draft report due to be released for consultation in October 2013,” said Ms Begg.
Background
The Dairy Industry Restructuring Act 2001 (as amended July 2012) requires the Commission to undertake two separate reviews of Fonterra’s base milk price setting in each dairy season:
- Review of Fonterra’s Farm Gate Milk Price Manual (Review of the Manual), which sets out the methodology for calculating the base milk price for the season.
- Review of Fonterra’s base milk price calculation (Review of the base milk price calculation).
This is the second of the two annual reviews the Commission is required to undertake. The Commission completed the first Review of the Manual in December 2012.
This report relates to the review of the base milk price calculation. Section 150P of the Act requires us to report on the extent to which the assumptions adopted and the inputs and process used by Fonterra in calculating its base milk price are consistent with the purpose of Subpart 5A (s 150A) of Dairy Industry Restructuring Act 2001.
Section 150A of the Dairy Industry Restructuring Act 2001 specifies that the purpose of the milk price monitoring regime is to promote the setting of the base milk price by Fonterra:
- that provides an incentive for Fonterra to operate efficiently, while
- providing for contestability in the market for the purchase of milk from farmers.
The assumptions adopted and the inputs and process used by Fonterra are provided in Fonterra's 'Reasons' paper for the 2012/13 base milk calculation, which is available on our website at www.comcom.govt.nz/statutory-review-of-milk-price-calculation
The Commission is required to make its final report on the review of the base milk price calculation by 15 September in each year. In 2013, 15 September falls on a Sunday. Consistent with s 35(6) of the Interpretation Act 1999, we publish our report the following business day, which is Monday 16 September 2013.