Commission questions Fonterra payouts

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 monitoring regime.

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 milk.

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 manual.

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 regime.

''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 sector.

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.

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