The Commerce Commission has released its final report on Fonterra’s calculation of the base milk price it will pay farmers in the 2020/21 dairy season.
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The Commission found that Fonterra’s forecast price of $7.45 - $7.65 per kilogram of milk solids for the season is calculated in a way that is likely to be consistent with the requirements of the milk price monitoring regime under the Dairy Industry Restructuring Act (DIRA).
The key areas of the Commission’s focus in this year’s review were two components of the cost of capital (the asset beta and specific risk premium), the appropriateness of provisions for asset stranding, and the inclusion of instantised milk powder as a reference product in the calculation of the base milk price.
Fonterra sets its base milk price according to rules set out in its Farmgate Milk Price Manual. DIRA requires the Commission to review Fonterra’s methodology for calculating the price and to conclude on whether the calculation is consistent with the purpose of DIRA.
The Commission’s final conclusion is that Fonterra’s calculation is likely to be consistent with both the efficiency and contestability purposes of DIRA. This conclusion takes into account issues identified by stakeholders with the estimate of the asset beta that warranted a change from the Commission’s draft conclusion on this matter.
The Commission notes that in practice the methodological issues with the estimation of the asset beta identified in submissions do not have a material impact on the base milk price for this season.
The Commission’s role does not extend to setting or recommending the base milk price, nor does it extend to monitoring or setting the retail prices for dairy. The prices Fonterra receives for processed commodity milk products are generally set on the global marketplace.
DIRA has recently been amended by Parliament, with a change reducing Fonterra’s discretion in setting the asset beta. This change will come into effect for next year’s review. ■