A decision by Fonterra to cut last season's forecast payout
to 55c below what was calculated in its milk price manual was
not consistent with incentives for the dairy giant to operate
efficiently, a Commerce Commission draft report has found.
The commission has released its draft report on the
co-operative's base milk price calculation, as required as
part of the Dairy Industry Restructuring Act's milk price
The scope of the commission's review was to look only at the
base milk price - the price Fonterra paid to farmers for raw
milk - not the retail price consumers paid for processed
The most significant issue in this year's review was
Fonterra's decision to pay farmers an adjusted price that was
less than the milk price calculated under its milk price
Fonterra's board had the discretion to pay a lower farm-gate
milk price than specified under the manual, if it was in the
best interests of the co-operative.
Fonterra was setting a lower price to cancel out the adverse
effect of ''a number of unanticipated events'' that would
otherwise have had a negative impact on its profits,
commission deputy chairwoman Sue Begg said.
The commission emphasised the regime was only intended to
monitor, not restrict, how Fonterra calculated the price.
There were no consequences for Fonterra under the Act if the
commission's final report, which will be published by
September 15, found the company had set a price which was not
consistent with the purpose of the milk price monitoring
''The monitoring regime only requires us to look at whether
Fonterra's base milk price calculation provides incentives
for Fonterra to operate efficiently.
"We recognise there are many other factors that provide
efficiency incentives for Fonterra, so our draft finding does
not imply that Fonterra is inefficient,'' Ms Begg said.
However, in the longer term, the commission might be
concerned whether the wider efficiency objectives of the Act
were being met if significant discounts persisted, she said..
A working group has been established to determine ways to
meet the future capability needs of the dairy processing
Improving people capability to strengthen the food safety
system was a recommendation of the independent Government
inquiry into Fonterra's whey contamination scare last year.
The inquiry highlighted the shortage of experienced people
with processing expertise across the industry's regulatory
sector and at all levels of the system, Primary Industries
Minister Nathan Guy said.
The group, chaired by Ruawai dairy farmer and former Fonterra
director Greg Gent, has representatives from the dairy
industry, science and education providers, and relevant
government departments and agencies.
It is expected to submit its final report to the Ministry for
Primary Industries director-general Martyn Dunne by the end
of July next year.