Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
The non-statutory dry run review was carried at the request of the Minister for Primary Industries to show how the Government's new milk price monitoring regime would work in practice.
Fonterra chief financial officer Jonathan Mason says the report's findings show the methodology used to set Fonterra's Farmgate Milk Price does provide for contestability in the market.
"Fonterra has satisfied all 13 of the key drivers for the Farmgate Milk Price reviewed under the statutory testing," Mason says. "The dry run noted a minor issue relating to the calculated cost of capital and this has been addressed for the current season."
Mason noted the commission's assessment provides a solid basis for confidence that our shareholders, the New Zealand public and wider stakeholders can have in the integrity of the Farmgate Milk Price.
"This outcome also provides a sound foundation for full reviews the Commerce Commission will undertake over the next 12 months and beyond," he says.
Sue Begg, Commerce Commission deputy chair, says the timeframe for carrying out the dry run review was compressed as the minister wanted it completed before Fonterra's planned move to Trading Among Farmers (TAF).
"I'm pleased we were able to meet that deadline and help to provide some clarity over the future regulatory environment for the New Zealand dairy industry," she says.
"Following our consideration of submissions from interested parties and our own analysis, our conclusion is that Fonterra's setting of the farm gate milk price is not inconsistent with the purpose and principles of the milk price regime set out in the amended Dairy Industry Restructuring Act."
The review was started using the exposure draft of the amendments to the Dairy Industry Restructuring Act (DIRA) proposed in January 2012, but was completed after the amendments to DIRA were passed by Parliament in July 2012. The final amended legislation included a number of changes from the January 2012 proposals.
Under the milk monitoring regime established in the amended DIRA, the Commission will monitor and report on the extent to which Fonterra's setting of the farm gate milk price is consistent with the purpose and principles of the newly amended legislation.
"As we initially concluded in our draft report in May, Fonterra's farm gate milk price 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 operate efficiently," said Begg.
Fonterra retains significant discretion over how the farm gate milk price is set. The monitoring regime cannot provide certainty over how the farm gate milk price will be set or that it will not change over time. However, the monitoring regime will make Fonterra's process and calculations more transparent.
You can find the final report on the Commission's website here www.comcom.govt.nz/review-of-fonterra-s-farm-gate-milk-price
