Regulator OKs Fonterra's 2014/15 milk price, interest free loans under scrutiny in next review

Tuesday 15th September 2015

The Commerce Commission has given the final tick of approval to Fonterra Cooperative Group's 2014/15 milk price, with the regulator saying it will go on to examine the impact of the dairy exporter's interest free loans to farmers on the base milk price, which has been introduced to help them through the current season.

The competition watchdog is required to check Fonterra's base milk calculations annually as part of the Dairy Industry Restructuring Act's milk price monitoring scheme, and today said Auckland based Fonterra's $4.40 per kilogram of milk solids payment for the season just finished was largely consistent with the efficiency and contestability purposes of the legislation.

The commission's final report didn't veer too far from its draft view in August, finding the base milk price calculated was consistent with efficiency criteria, though the use of actual data in some instances provided "incentives (that) are potentially weaker in those cases than if notional data had been used," the report said. The assumptions adopted, and inputs and processes used met the contestability dimension, which are intended to assess whether those assumptions are practically feasible for a notional producer.

DIRA and the competitiveness of New Zealand's dairy market is currently the subject of a nine-month review by the Commerce Commission. Among the issues under investigation is whether the DIRA competition thresholds have been met, which could see Fonterra freed of some of the regulatory obligations it has borne since its creation in 2001.

Fonterra has slashed its forecast payout for the current season to $3.85 per kgMS as dwindling Chinese demand and increased global production eroded international prices. In response, Fonterra will offer 50 cents/kgMS as an interest-free loan against the next season's payout to help tide over cash-strapped farmers.

The regulator today said it will look at whether those loans have any impact on the base milk price in its next review.

The regulator noted Fonterra's improved disclosure in the draft review, and today said it would encourage the dairy exporter to continue to provide more information.

"We also think that there needs to be a more explicit mapping from the milk price manual to the base milk price calculation to enable interested parties to see the connection between the higher level rules in the milk price manual and the detailed base milk price component calculations," the report said. "This would also identify areas where Fonterra has exercised judgment in applying the rules in the milk price manual."

The commission said it still hasn't decided whether Fonterra's weighted average cost of capital component of the base milk price is consistent with the regulatory regime. It wants more information from the company in the upcoming review and will also look at developing its aggregate assessment, using the individual components that make up the milk price calculation in totality.

BusinessDesk.co.nz

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