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The Commerce Commission has today released a draft report on the dry run review of Fonterra’s farm gate milk price and is seeking submissions from interested parties on its initial conclusions.
The Dairy Industry Restructuring Amendment Bill 2012 (the DIRA Bill) proposes 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 milk price regime set out in the DIRA Bill.
Prior to the DIRA Bill being passed into law, the Minister for Primary Industries requested that the Commission conduct a non-statutory dry run review of how Fonterra sets the 2011/2012 farm gate milk price. The dry run review is intended to show how the Government-proposed milk price monitoring regime would work in practice, before Fonterra’s planned move to Trading Among Farmers (TAF).
“It’s important to understand that the DIRA Bill, and our dry run review, are not concerned with the retail price for milk, only Fonterra’s farm gate milk price. This is the price that Fonterra pays dairy farmers for their raw milk and is worked out using a pricing methodology set by Fonterra. It is this pricing methodology – and Fonterra’s application of it – that we are reviewing,” said Sue Begg, Commerce Commission Deputy Chair.
Based on the evidence currently available and the issues considered in the dry run review, the Commission’s initial 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 DIRA Bill.
“Most of Fonterra’s current assumptions appear to be both practically feasible for Fonterra to achieve and reasonable for efficient processors to replicate. The assumptions do not preclude all efficient competitors from potentially competing with Fonterra in the New Zealand farm gate milk market, and will provide incentives for Fonterra to operate efficiently,” said Sue Begg.
“Fonterra retains significant discretion over how to set the farm gate milk price. 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,” said Sue Begg.
The Commission is seeking submissions on the draft report by 29 June 2012. The Commission will consider all submissions before releasing its final report by mid August 2012.
The Commission is presenting its initial conclusions of the dry run review to the Primary Production Select Committee today to inform the Committee’s considerations about the changes proposed to the DIRA Bill.
Why are we conducting this dry run review?
Prior to the DIRA Bill being passed into law, the Minister for Primary Industries requested that the Commission conduct a non-statutory dry run review of Fonterra’s 2011/12 methodology for setting the farm gate milk price and Fonterra’s application of that methodology.
The purpose of the dry run review is to inform potential TAF investors of how the milk price monitoring regime would work in practice.
What is involved in the dry run review?
During the dry run review, the Commission has focused on a limited number of key issues in considering Fonterra’s milk price manual and its farm gate milk price calculation. In respect of those issues, we examined the extent to which Fonterra’s setting of the farm gate milk price should provide incentives for Fonterra to operate efficiently, and not preclude all efficient competitors from entering and competing for farmers’ raw milk.
What are the limitations of the dry run review?
The dry run review, and the initial conclusions the Commission has drawn from it, are limited in a number of respects, including that we have focused on a limited number of key issues and that we have had to adopt a particular interpretation of the key provisions in the DIRA Bill. The final form of the legislation may differ from that proposed in the DIRA Bill.
Although we comment on the appropriateness of Fonterra’s approach and assumptions in setting the farm gate milk price, Fonterra retains significant discretion in setting that price. Our monitoring, therefore, does not provide certainty over precisely how the farm gate milk price will be set or that it will not change over time. However, our draft report does show interested parties how we intend to implement the Government-proposed milk price monitoring regime in practice, should the DIRA Bill be passed into law in its current form. It therefore improves clarity over the potential future regulatory environment for the New Zealand dairy industry.
We have identified areas which require further information and/or analysis by Fonterra, and other areas where we consider that the clarity and content of Fonterra’s milk price manual can be improved.
What are the next steps in the dry run review?
The Commission welcomes submissions on the draft report to assist in testing our analysis and draft conclusions before we finalise our dry run review. The making of submissions, and our consideration of submissions, may also increase understanding of, and confidence in, the milk monitoring regime prior to the proposed launch of TAF. Submissions are due by 5pm on Friday, 29 June 2012. We intend to publish our final report on the dry run review by mid August 2012.