Dairy giant Fonterra is operating within the rules when it sets the price it pays to farmers for their raw milk, the New Zealand Commerce Commission has confirmed.
The Commission, which regulates industrial competition in the country, made the statement following the issue of a review into Fonterra’s farm gate milk prices (FGMP) - the price paid by dairy processors, such as Fonterra, to dairy farmers for their raw milk.
Public concerns have been raised about milk prices in New Zealand, where Fonterra collects approximately 89% of the total raw milk supply.
The review was conducted as a ‘dry run’ to illustrate how the proposed Dairy Industry Restructuring Amendment (DIRA) Bill 2012 will work.
Under the DIRA Bill, the Commerce Commission will monitor and report on the extent to which Fonterra’s setting of FGMP is consistent with the principles of the milk price regime set out in the new legislation.
“Based on the evidence currently available, our initial conclusion is that Fonterra’s setting of the farm gate milk price does not appear to be inconsistent with our interpretation of the purpose and principles in the Bill,” said the Commerce Commission report.
The DIRA Bill, which is currently before the New Zealand parliament, proposes a number of new roles for the Commerce Commission, including the monitoring of Fonterra’s methodology for setting farm gate milk price.
Prior to the bill being passed, New Zealand’s Minister for Primary Industries requested that the Commerce Commission conduct a ‘dry run’ review of Fonterra’s current price setting methodology.
“Although we comment on the appropriateness of Fonterra’s approach and assumption 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 that 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 it be passed into law in its current form,” added the report.
Trading Among Farmers
An additional purpose of the ‘dry run’ was to provide helpful investor information ahead of Fonterra’s launch of the Trading Among Farmers (TAF) scheme, which is an opportunity for dairy farmers to sell their Fonterra shares to build a fund of shares available for external investors.
Fonterra chairman, Sir Henry van der Heyden, spoke recently in support of the DIRA Bill, stating that its passing would be “crucial” for Fonterra in introducing its TAF scheme.
“The bill be put Fonterra in a position where it can introduce Trading Among Farmers. And Trading Among Farmers will enable Fonterra to remain the national champion our farmer shareholders and New Zealand need.”
“We need a stable permanent capital base to implement our refreshed business strategy that will drive returns for our shareholders, and to also protect the Co-op from future shocks such as major drought,” van der Heyden added.