Fonterra milk price manual okay – Com Com

The Commerce Commission’s first statutory review of Fonterra’s milk price manual has given it qualified approval:

Our conclusion is that, to the extent we are able to assess it, Fonterra’s manual is not inconsistent with the purpose of the DIRA milk monitoring regime. There are a couple of elements that we consider are not fully consistent with the efficiency aspect of the purpose, but they only have a minor impact,” said Sue Begg, Commerce Commission Deputy Chair.

Ms Begg said there were a number of caveats to the Commission’s conclusion.

“In particular there are three matters about which we are unable to form a view in our report, and which we consider to be potentially material,” she said. “We will examine these matters again in our second, separate but related, review in September 2013. In that review we will look at how Fonterra has applied the milk price manual to calculate the milk price.”

The three matters of potential concern are the regions where plants are assumed to be added, the calculation of milk collection costs, and the treatment of assets that are no longer required.”

“There are also other matters about which the manual is not specific. We will not be able to form a view on these until the September review.”

“Parts of Fonterra’s milk price manual states general principles or high level rules. While these are not in themselves inconsistent with the purpose, they could be implemented in a manner that is,” said Ms Begg.”

The full report is here.

Greens want milk price set by commissioner

Fonterra has published a farm gate milk price manual which shows the link between global dairy prices, the amount farmers are paid and the retail price of milk here.

The Statement shows that the 2011 Farmgate Milk Price of $7.60 per kilogram of milksolids (kgMS) was based on revenue[1] of $9.51 per kgMS, less cash and capital costs totaling $1.91 per kgMS.

The 2011 Farmgate Milk Price is $1.50 higher than the previous 2010 Season’s $6.10 per kgMS. This is driven by an increase of $1.56 in net revenue, offset slightly by an increase of 6 cents in costs.

“These figures demonstrate what Fonterra has been saying all along – that the price New Zealand farmers are paid for milk, which in turn flows into retail dairy prices, reflects global prices for dairy commodities,” said Fonterra’s chief financial officer Jonathan Mason.

The 2011 milksolids payment to farmers of $7.60 per kgMS equates to approximately 66 cents per litre of liquid milk.

Over the past two Seasons, net revenues have increased $2.96, or 45%, but in the same period costs have increased by 8 cents or 4% – roughly in line with inflation.

When we export most of our milk, the global market price has a big influence on both the payout to farmers and the retail price.

Green Party MP Sue Kedgley gets the link but says:

“The Milk Price Manual confirms that Fonterra largely bases the domestic price of milk on the global price Fonterra would get by selling milk solids overseas,” said Ms Kedgley.

“We have heard evidence during the Select Committee Milk Price inquiry that the global milk price is hugely inflated by speculators trading in milk.

“This means that New Zealanders ability to pay for a staple food product is being adversely affected by global commodity speculators.

“The Green Party considers that domestic milk prices should not be determined by an inflated global milk price,” said Ms Kedgley.

“We consider a good first step in tackling this issue would be for the domestic price of milk to be set by set by an independent body or Commissioner, not Fonterra.”

Welcome to the socialist republic where the company which produces the milk would have to accept the price set by a commissioner.

The Argentinean government tried to keep the domestic price of beef down by imposing exorbitant taxes on exports. Famers faced with that market signal gave up on cattle and swapped to growing soya which gave them better returns.

Farmers here would make a similar response to an attempt to depress the domestic milk price which, in effect, would mean they were subsidising consumers.

If the Green Party wants to be taken seriously it’s MPs need to get a better grasp of economics.

They could start by looking at the law of supply and demand and the relationship between them and prices.

 

 

On-line calculator unbundles milk price

The price of milk and Fonterra’s role in setting it is the subject of on-going debate and will now be investigated by a Select Committee.

The ValueAdd Company has done a lot of the work for them and has beaten them to the unbundling.

They’ve used the information they’ve found to provide  an on-line calculator which shows the cost components of milk production.

The calculations, which are based on some guesstimates, show the retail price includes mark-ups of 12% by Fonterra, 15% by wholesalers and 30% by retailers.

In a media release the company explains its calculations and concludes:

We built up other information from the referenced sources and our calculations came to the somewhat surprising conclusion that for the year ended 30 June 2011, a forecast payment to suppliers for milk of $8.00 per kg of milk solids (not yet finalised) would be $2.73 or 51.7% greater than the figure required to produce a break-even net margin on exported commodity products.

I am not sure why that is surprising.

It has been a particularly good year for commodity prices and the payout to farmers will reflect that and help make up for a couple of seasons ago when most dairy farms posted losses.

Fonterra’s farmgate price formula sound

Competition in domestic dairy production has increased since Fonterra was formed and the way it sets its farmgate milk pirce is sound.

This was the finding of internationally renowned competition expert, Compass Lexecon, which has been ranked as one of the leading antitrust economics firms in the world by Global Competition Review for the past seven years.

Fonterra commissioned Compass Lexecon to provide an economic evaluation of the competitive environment for dairy processing and to also review the methodology for calculating the milk price paid to Fonterra’s farmer-shareholders.

The report found that:

• There had been a growth in competition in the New Zealand dairy industry under the Dairy Industry Restructuring Act.
• There has been a significant investment in expanded dairy processing capacity in New Zealand by competitors as well as Fonterra since Fonterra was formed. This investment in new more efficient plant was driving down manufacturing costs.
• The way Fonterra calculates its milk price – based on global prices for commodities, less the costs of a notional competitor – was correct.
• Domestic dairy prices in New Zealand have increased less than global prices for dairy product, largely because of the growth of supermarket home brands sold at a discount. (Around 70 per cent of domestic fresh milk sales in New Zealand are now home brands.)

Compass Lexecon endorsed the fact that the Fonterra milk price was based on the costs of a notional competitor using efficient processing facilities, rather than Fonterra’s actual manufacturing costs. It noted that there had been considerable expansion of dairy processing in New Zealand, with more efficient plant commissioned by both Fonterra and competitors: “Even if Fonterra (and other processors) … have higher average variable costs of processing, the farm gate milk price will be bid up by competitors utilising efficient plants,” the report concluded.

“The history of actual expansion by both Fonterra and independent processors … indicates a strong belief by both Fonterra and competitors that they can secure a supply of raw milk at a price that allows them to operate profitably.”

Fonterra Group Chief Financial Officer, Jonathan Mason, said the Compass Lexecon report essentially concluded that the New Zealand environment was fostering competition in the dairy sector and that the way Fonterra set its milk price was fair.

“The Milk Price reflects international dairy commodity prices, less the costs to produce and export those commodities. . . “

This should allay fears that Fonterra is using its dominent position in setting prices which disadvantage its competitors and consumers.

The company has announced that it will be reducing the domestic price of butter and cheese in response to falls in international prices.