The base milk price is the price Fonterra pays to farmers for raw milk and it is currently set by Fonterra at NZ$3.90 ($2.84) per kilogram of milk solids for the 2015-16 season. The report does not cover the forecast 2016-17 price of NZ$4.25 ($3.09) recently announced by Fonterra.
The Commission is required to review Fonterra’s calculation each year at the end of the dairy season under the milk price monitoring regime in the Dairy Industry Restructuring Act (DIRA).
Information shows consistency
Deputy chair Sue Begg said Fonterra’s calculation of the 2015/16 base milk price is consistent with both the efficiency and contestability purposes of DIRA.
Begg said that Fonterra provided information to compare the performance of Fonterra’s production operation with the notional values used in the base milk price calculation.
“This comparison has helped us to conclude that the calculation is practically feasible as a whole. We have also concluded that the cost of capital component of the calculation is consistent with the purposes of DIRA. This was an area of the calculation that we have previously been unable to reach a conclusion on,” Begg said.
Promoting Fonterra transparency
The focus of the review is solely on the farm gate milk price and not any other milk price within the milk supply chain. The term used in DIRA for the ‘farm gate’ milk price is ‘the base milk price set for that season.’
The milk price monitoring regime is intended to provide incentives for Fonterra to operate efficiently, while providing for contestability in the market for the purchase of milk from farmers. It also promotes greater transparency of Fonterra’s base milk price setting processes.
The regime has the effect of monitoring whether the price that Fonterra chooses to set to buy milk might be too high or too low relative to the price that would exist if the market for purchasing farmers’ milk was workably competitive or contestable.