Strong production, tested demand send milk prices crashing
Strong global milk production and rebalancing of demand among key buyers has delivered one of the biggest drops in whole milk powder prices in recent years.
Fonterra's announced on December 11 of a forecast farm gate milk price for 2013/2014 which is less than that calculated under the Milk Price Manual, it was noted by the commission.
"It's the Commission's view that Fonterra's decision doesn't affect our review of the milk price manual," says Commerce Commission deputy chair Sue Begg.
"However, we will consider the implications of any deviation from the Milk Price Panel's recommendations for the base milk price when we review how the milk price manual is applied to set the milk price. That is the second review we have to undertake by September 15, 2014."
The comments were made when Commerce Commission released its final report on its statutory review of Fonterra's milk price manual. The manual determines how Fonterra calculates the farm gate milk price, which is the price paid by Fonterra to dairy farmers for their raw milk.
This is the first of two statutory reviews that the Commission is required to undertake each milk season under the 2012 amendments to the Dairy Industry Restructuring Act 2001 (DIRA).
The Commission has concluded the 2013/14 Milk Price Manual is largely consistent with the purpose of the DIRA milk monitoring regime.
However the Commission notes that the lack of prescription in some rules in the manual reduces transparency, which is important to the efficiency objective. The lack of prescription has also resulted in the Commission being unable to conclude on the extent to which two rules in the Manual for the 2013/14 dairy season are consistent with the contestability objective of the legislative purpose. The Commission will consider the specific application of the rules during the second statutory review at the end of the season.
During the consultation process, Fonterra provided additional clarification in respect of one issue from the Commission's previous reviews, regarding the treatment of stranded assets, that had not been addressed by Fonterra in the 2013/14 Manual.
Under section 150H of DIRA, the Commission must undertake two separate reviews of Fonterra's base milk price setting in each dairy season:
• Review of Fonterra's Milk Price Manual (review of the Manual), which sets out the methodology for calculating the base milk price for the season.
• Review of Fonterra's base milk price calculation (review of the base milk price calculation).
