Consumers are already hurting at the checkout from general food cost inflation / Photo / Sylvie Whinray
With prices rising at the dairy chiller, the pressure's on the Government to take another look at Fonterra's right to have a big say in setting the country's farmgate milk price - and the agriculture minister is not ruling out change.
The farmgate milk price - the price that market-dominant Fonterra pays its farmers for raw milk and that its processing competitors benchmark off - does not directly set prices at the supermarket.
Those are determined by retailers, and Agriculture Minister Damien O'Connor is quick to say "issues with the local market are tied up with the dominance of the supermarkets".
But retail prices reflect the farmgate milk price which in turn is a reflection of global dairy prices. Prices continue to be strong with Fonterra, the country's biggest business, recently announcing a record forecast milk payment to farmers of $9.30-$9.90/kilogram of milksolids.
The exporter, which 21 years after its creation from an industry mega-merger still collects most of the country's raw milk, is also a major player at the grocery chiller.
Its New Zealand consumer manufacturing business has to pay the same price for commodity milk as its global customers, and that is passed on as a wholesale price to retailers.
So, high global prices are great for the economy - Fonterra's latest forecast for the 2021-2022 dairy season will mean $14 billion for the economy - and for dairy farmers.
But not great for Kiwi consumers already hurting at the checkout from general food cost inflation.
And, say some of Fonterra's much smaller processing competitors, not great for us.
They've long grumbled about Fonterra's legislated right to have a major say in setting the farmgate milk price - albeit with the Commerce Commission keeping an eye on things and extra disclosure through a milk price methodology "manual". The process is also monitored by a milk price panel, which includes a government appointee.
They want Government action to remove that right.
Speaking on condition of anonymity, they claimed Fonterra "games" the milk price, and that if the job of setting the base milk price was given to a truly independent entity, more processors might enter the domestic consumer market. This they suggest would bring down retail prices. Most processors of any size currently export.
However they conceded the small size of New Zealand's retail market could also dampen enthusiasm to enter this market.
One company believes Fonterra has inflated the price by as much as 25c/kg milksolids, which can mean the difference between profit and scraping by for a smaller company which has to match the price to keep farmer-suppliers.
Milk production is flatlining, likely to fall. Retaining and attracting supply is a major challenge for Fonterra, a farmer-owned co-operative, and other companies.
Fonterra's price gaming over the years has meant some smaller companies that should be thriving and growing are not, and investor shareholder returns have been eroded, claimed one observer.
"They play around with capital ratios, they play around with the off-GDT (Global Dairy Trade market) sales, they play around with yields. They inflate the milk price," said another.
"We need an independent [body] to determine the milk price. This would give the Government and the country confidence the milk price is set right."
Minister O'Connor, currently running the regulatory ruler over Fonterra's proposed capital restructure, told the Herald the gaming claims are being looked at as part of that scrutiny.
"If it has been gamed - and some have made those claims - then maybe things can be changed to improve it. That's what we are looking at at the moment.
"The milk price and how it is set has long been a contentious issue and it's important that it is open. I'm mindful of the fact first and foremost it has a huge influence on Fonterra and that other companies benchmark off it."
O'Connor said it was hard to assess if Fonterra gamed the milk price.
"Over time any company that pays too much for milk will suffer and some would say Fonterra already has. Ensuring it gets that setting right into the future will determine its success and that of the wider dairy industry."
He believed there was competition at the supermarket chiller. "I'm not convinced that would bring more competition and cheaper prices."
The Herald asked chairman Peter McBride to respond to the price gaming claim.
He did not address it in a written response to questions.
"I want to be very clear with the public that Fonterra does not set the price of milk in New Zealand. Ultimately that's a decision for retailers.
"We do not set the milk price for other processors – they set their own prices and are not subject to the same regulatory and monitoring practices as our co-op.
"We have been clear in conversations and submissions to government that we fully support moves to provide greater transparency of how all processors determine their milk price.
"We formally submitted that DIRA (Dairy Restructuring Act) be amended to require all milk processors to publish the average price they pay farmers, the key parameters of their milk price and examples showing the payout farmers would receive for different parameters.
"Our milk price is a cost for all our customers who choose to purchase product from us, including brands that make products that you see on supermarket shelves.
"Each of our customers will make their own decisions about whether they reflect the recent higher global milk prices in their own wholesale pricing, and their customers – which are the retailers – will decide whether to reflect any price increases in retail prices the public pay."
McBride said "generally" consistent commodity prices could be expected to eventually flow through to the supermarket shelf.
"The price Fonterra does have a role in setting is the farmgate milk price, which is the amount our farmers receive for their milk.
"The farmgate milk price is monitored under DIRA. Global Dairy Trade prices are used in this calculation and are a strong factor in determining the farmgate milk price. At the end of each dairy season, the Commerce Commission undertakes a review of this calculation to assess whether it is consistent with the milk price monitoring regime as set out in DIRA."
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