Fonterra asked to review milk price system

The Commerce Commission wants Fonterra to review its reference commodity product basket more frequently than the five-year period currently required. Photo/File

The Commerce Commission wants Fonterra Cooperative Group to more regularly review the basket of products used to set its farmgate milk prices.

The antitrust regulator gave the Auckland-based milk processor's 2015/16 base milk price calculation the thumbs up, saying the price was largely consistent with the efficiency and contestability purposes of the Dairy Industry Restructuring Act. Each season the commission is required to review Fonterra's calculation of what it pays farmers for raw milk to ensure the world's biggest dairy exporter isn't abusing its legislated dominance.

The commission held off on making a conclusion on the components Fonterra uses to evaluate its weighted average cost of capital, known as the asset beta, saying it needs more information.

"Having considered the submissions made on the draft report, we decided we did not have enough evidence to conclude on the practical feasibility of the asset beta," commission deputy chair Sue Begg said. "However, we do feel that this is a matter that can be resolved and have set out in our report suggested next steps in this regard."

It wants Fonterra to review its reference commodity product basket more frequently than the five-year period currently required, more transparency of forecast information, greater disclosure of its actual global ingredients and operations businesses compared to the notional producer assumed in the rules, and more information on the cost of capital.

Last month Fonterra proposed changes to the Farmgate Milk Price Manual for the 2016/17 season that would expand the basket of reference products, a move it estimated would lift the farmgate milk price by 4-to-5 cents per kilogram of milk solids.

Fonterra sells a greater proportion of reference products outside of the GlobalDairyTrade platform, allowing it to "achieve prices materially above GDT prices", which suggested relying solely on prices from the auction platform might not be appropriate anymore, the report said.

The dairy processor's analysis showed that including mozzarella or milk protein concentrate 85 (MPC 85) would have increased the base milk price if it was substituted for whole milk powder, but shouldn't be part of the reference basket because none of Fonterra's local competitors manufactured those products and they weren't commoditised.

Fonterra is looking at adding UHT dairy products as a reference, saying they had become sufficiently commoditised, although the company had yet to find an appropriate benchmark.

The regulator said Fonterra's analysis of the basket appeared reasonable but recommended the company review the volumes of mozzarella and MPC 85 necessary to be deemed commoditised, and also evaluate the impact of including UHT in the reference basket.