Fonterra gets tick in 'dry run' review

FOonterra has welcomed the Commerce Commission's final report on a "dry run" review of how the dairy giant sets its farm gate milk price.

The report found it was not inconsistent with the purpose and principles of the milk price regime set out in the amended Dairy Industry Restructuring Act (Dira).

It did provide for contestability in the farm gate milk market, as overall the assumptions the co-operative used in setting the price were practically feasible for an efficient processor, commission deputy chairwoman Sue Begg said.

The commission undertook the non-statutory review at the request of Primary Industries Minister David Carter to show how the Government's new milk price monitoring regime would work in practice. It was only concerned with the farm gate milk price, not the retail price for milk.

The timeframe was compressed as Mr Carter wanted it completed before Fonterra's planned move to Trading Among Farmers, to help provide some clarity over the future regulatory environment for the dairy industry.

Fonterra's board has been working towards a November launch of Taf dependent on market conditions.

Under the milk monitoring regime established in the amended Dira, the commission would monitor and report on the extent to which Fonterra's setting of the farm gate milk price was consistent with the purpose and principles of the newly amended legislation.

Fonterra retained "significant discretion" over how the farm gate milk price was set. The monitoring regime could not provide certainty over how the price would be set or that it would not change over time. However, the regime would make Fonterra's process and calculations more transparent, she said.

The commission's assessment provided a solid basis for confidence that Fonterra shareholders, the New Zealand public and widerstakeholders could have in the integrity of the farm gate milk price.

It also provided a sound foundation for full reviews the commission would undertake over the next 12 months and beyond, Fonterra's chief financial officer Jonathan Mason said.

Fonterra had satisfied all 13 of the key drivers for the farm gate price reviewed under the statutory testing.

The dry run noted a minor issue relating to the calculated cost of capital and that had been addressed for the current season, Mr Mason said.

 

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