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Fonterra Milk Price Transparency Improving, Report Suggests

19 August 2016

NEW ZEALAND - New Zealand's Commerce Commission has released its draft report on Fonterra’s base milk price calculation for the 2015/16 dairy season.

The base milk price is the price Fonterra pays to farmers for raw milk and it is currently set by Fonterra at $3.90 per kilogram of milk solids for the 2015/16 season just ended. The report does not cover the forecast 2016/17 price of $4.25 that Fonterra recently announced.

The Commission is required to review Fonterra’s calculation each year at the end of the dairy season under the milk price monitoring regime in the Dairy Industry Restructuring Act (DIRA). It monitors whether the prices are too high or too low, compared with the hypothetical price if the market was more competitive.

Deputy Chair Sue Begg said Fonterra’s calculation of the 2015/16 base milk price is consistent with both the efficiency and contestability purposes of DIRA.

“We have worked closely with Fonterra over the past few years to provide clearer information about how it calculates the milk price. We’re pleased to see further improvements that will assist the broader dairy industry to understand Fonterra’s approach,” Ms Begg said.

“This year Fonterra has provided information that has enabled us to compare the performance of a real world Fonterra production operation with the notional values used in the base milk price calculation. This comparison has helped us to conclude that the calculation is practically feasible as a whole.

"We have also concluded that the cost of capital component of the calculation is consistent with the purposes of DIRA. This was an area of the calculation that we have previously been unable to reach a conclusion on.”

Further Reading

The draft report is available here.

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