The Commerce Commission today published its final report on its annual review of Fonterra’s Farmgate Milk Price Manual for the 2020/21 dairy season (Manual), which contains Fonterra’s methodology for calculating its base milk price.

This year’s review focused on the changes Fonterra has made to the Manual since last year. These include moving the responsibility to independently review certain aspects of the milk price calculation to the Milk Price Group, and the introduction of the ability to apply the outcome of a ‘Within-Period Review’ to the year in which the review is undertaken.

The findings of the final report are unchanged from the draft released in October. 

We are satisfied Fonterra’s manual is largely consistent with both the efficiency and contestability dimensions of the purpose of the base milk price monitoring regime. 

The Commission will review how Fonterra applies the Manual when it assesses the 2020/21 base milk price calculation at the end of the current dairy season.

The final report and related information can be found here.

Background

The Commission’s review

Each year the Commerce Commission reviews Fonterra’s Manual for the dairy season that has just started (the dairy season runs from 1 June until 31 May). The Manual sets out Fonterra’s methodology for calculating its base 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 Farmgate Milk Price Manual at the beginning of each dairy season under the milk price monitoring regime in the Dairy Industry Restructuring Act 2001 (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’).

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. This review assesses whether the costs, revenue and other assumptions used in the base milk price calculation provide an incentive for Fonterra to operate efficiently and are practically feasible for an efficient milk processor

We published our base milk price calculation 2019/20 final report in September 2020.

Contact:

Phone:

Email: