ComCom pleased with greater Fonterra openness on off-GDT sales, unconvinced by asset beta

Friday 15th September 2017

The Commerce Commission is pleased with the prospect of greater transparency in Fonterra Cooperative Group's off-GlobalDairyTrade sales, but is still unsure whether a component of the dairy company's milk price calculation met the law.

Today's final report on Fonterra's base milk price calculation for the 2016/17 season was largely in line with its draft findings in August, and the commission said it was happy with Fonterra's commitment for greater disclosure, something it's been seeking as the sales channel becomes increasingly important to the cooperative. Fonterra agreed to release the cents per kilogram of milk solids of additional off-GDT sales in its milk price statement, the average full season GDT selling prices for each reference product, and definitions of 'standard packaging', 'specialised plant or technical resources', and 'standard product offerings' in its milk price manual.

"We welcome Fonterra’s commitment to disclose additional information to support this," commissioner Stephen Gale said in a statement. "However, we will continue to monitor the effectiveness of these disclosures for interested parties."

However, the regulator's report was a qualified pass, in that while the calculation met the requirements of the Dairy Industry Restructuring Act, the commission couldn't be sure Fonterra's asset beta - a component used to set the weighted average cost of capital - satisfied the legislation and wants more information from the dairy company and its rivals.

Each season the commission is required to review Fonterra's calculation of what it pays farmers for raw milk to ensure the world's biggest dairy exporter isn't abusing its legislated dominance.

The asset beta is a bone of contention with milk processors because a lower beta leads to a higher price for what Fonterra pays its farmer shareholders to supply raw milk and ultimately what rivals pay to access that pool. Fonterra contends comparable businesses have a greater value-add component and aren't as exposed to commodity price risk as it and its suppliers are, which is why it's at odds with the regulator's estimate.

The commission said the difference between Fonterra's estimate and the average comparable companies was "material" and equal to about 5 cents per kgMS.

"In order for us to be confident that the departure from the sample mean based on differences in systematic risk between the notional producer and the sample mean is justified, we need better information to inform the size of such an adjustment, such as on the extent to which the comparators pass on systematic risk in the way they set milk prices paid to farmers," the report said.

Gale said the regulator wants more evidence "on the degree of risk sharing between processors and other participants, implicit in the costs of capital of listed dairy companies" before it can make a solid conclusion in future reviews.

(BusinessDesk)

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