Commerce Commission confirms Fonterra milk price method

BUSINESSDESK: Fonterra's method for setting the benchmark Farm Gate Milk Price is "not inconsistent" with its obligations under the Commerce Act to ensure potential competitors are able to compete with it, the Commerce Commission says.

The competition watchdog released its report after a "dry run" review of the FGMP process, concluding it "does provide for contestability in the farm gate milk market, as overall the assumptions Fonterra used in setting the price are practically feasible for an efficient processor".

"The assumptions also provide incentives for Fonterra to efficiently."

That was despite Fonterra providing insufficient information on some six of the 13 legislative requirements relating to the FGMP to allow transparency, including a lack of transparency on yields, which the commission judged to have "very high" potential impact on the price.

Disclosure on yields was "not transparent" because the "methodology for calculating yields (is) not clearly stated in (the) milk price manual".

While the dry run exercise and future reviews do not require the commission to assess the transparency of the milk price manual, "we have identified areas where we will require further information for the next and/or analysis by Fonterra, and other areas where we consider that the clarity and content of Fonterra's milk price manual can be improved".

However, the commission concluded the regime "is not inconsistent with the purpose and principles of the milk price regime set out in the Dairy Industry Restructuring Act".

The act was passed to allow Fonterra to establish its Trading Among Farmers system, which will see the creation of non-voting tradeable securities which non-farmers can invest in, while allowing its co-operative farmer members to manage their own fluctuating capital needs without making calls on the balance sheet.

The regulatory regime for establishing a milk pricing benchmark regime is essential to encouraging domestic competition for Fonterra, and the dry run process saw submissions from a range of independent processors who have argued Fonterra is able to set the FGMP to suit its commercial needs best.

The commission says the amended act does not require an existing producer to be able to achieve the level of efficiency implied by the FGMP.

"As long as Fonterra or a potential entrant achieve that level of efficiency, then that ensures that the FGMP reflects a practically feasible level, and would provide a normal return on incremental investment."

The commission noted several limitations to the dry run review, some of which will be rectified in future statutory reviews.

These included not all the information received from Fonterra being available in the form sought, and not reviewing the appropriateness of the capital asset values used in the model.