NZ Commerce Commission expresses concern over Fonterra's risk calculations

By Jim Cornall contact

- Last updated on GMT

Fonterra calculates a higher milk price than would be the case if it used a more feasible allowance for risk in the cost of finance, the NZ Commerce Commisssion says. Pic: ©Getty Images/Oknopo
Fonterra calculates a higher milk price than would be the case if it used a more feasible allowance for risk in the cost of finance, the NZ Commerce Commisssion says. Pic: ©Getty Images/Oknopo

Related tags: Fonterra, New zealand dairy

New Zealand’s Commerce Commission has released its opinion that Fonterra’s estimate of risk in calculating the cost of financing milk processing operations is too low.

The impact is that Fonterra calculates a higher milk price than would be the case if it used a more feasible allowance for risk in the cost of finance, consistent with other processors.

The cost of financing (also known as the cost of capital) feeds into the calculation of the milk price Fonterra pays its farmers. The Commission administers a milk price monitoring regime under the Dairy Industry Restructuring Act (DIRA) as Fonterra has market power over the purchase of farmers’ milk.

“For several years now Fonterra has been unable to provide sufficient evidence to convince us that using a lower asset beta than comparable processers is justified,”​ Commission deputy chair Sue Begg said.

Asset beta ‘not feasible’

The asset beta is used to calculate the cost of financing milk processing operations, and in turn affects the milk price Fonterra pays its farmers. It reflects the extent to which the assets associated with processing milk are more or less risky than the stock market as a whole.

Begg added, “We acknowledge that estimating the asset beta with reliability and confidence is difficult. However, after considering all available information, including submissions on the independent report we released in April on the subject, our emerging view is that Fonterra’ asset beta of 0.38 is not practically feasible.

“We acknowledge there are differences between the risks borne by Fonterra and other comparable producers. However, based on the evidence we have, we do not consider the differences in the risks are sufficiently material or relevant to justify using an asset beta of 0.38."

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