Govt nominee in no rush to change milk price panel

Lincoln University Professor Hamish Gow says the system which sets the price Fonterra pays farmers for their milk is fundamentally solid and transparent.

Gow says the Global Dairy Trade (GDT) system creates a clear market benchmark, "And then the milk pricing model that we use is a very clear and defined process to be able to come up with a fair and equitable price for farmers.

"Actually, I think this system works a lot better than what most farmers and lots of the industry analysts probably recognise."

The Milk Price Panel was set up under DIRA, the Dairy Industry Restructuring Act, to oversee the process Fonterra uses to set its price to farmers. It is made up of a mix of Fonterra and independent members but Gow is the first independent member nominated by the Minister of Agriculture, as established by last year's DIRA review.

Gow explains that the Panel's statutory role is two-fold: to oversee the way Fonterra sets the price in accordance with its pricing manual, and review the manual itself from time to time and recommend any technical changes that ought to be made.

He says the GDT sets the base prices under five different commodity groups, then the model applies a number of factors based on a "hypothetically efficient" milk processing company to estimate what should be the farm gate price to all to any farmer in New Zealand.

The system is designed to ensure that Fonterra pays an honest and efficient price to all farmers, and ensures it runs a highly efficient milk collection and processing operation.

He says its near-monopoly status might otherwise allow it to impose what economists term "quasi rents" where farmers committed to large investments but holding time-critical product - such as fresh milk - would have no power to demand a fair price and could end up giving it away.

Although he has not yet attended a meeting of the Panel, Gow says, "As an outsider looking in, it's a solid and well-designed structure and process.

"It's probably the most effective mechanism that we've had, and it does give farmers protection to milk price movements with the way the structure is set up, and the way that Fonterra manages it."

Gow recently took up the Sir Graeme Harrison Professorial Chair in Global Value Chains and Trade at Lincoln University, after several years as Professor of Agribusiness at Massey and a long career overseas helping develop international trade systems, including four years seconded to the World Bank.

Lincoln University says the focus of the chair is on excellence in research, teaching, and extension to address the challenges New Zealand agricultural exporters face in becoming integral parts of major value chains and combating behind-the-border trade barriers.

In a statement welcoming his appointment to the Milk Price Panel, Lincoln said Gow's appointment would fulfil that mandate by bringing an academic rigour to government and industry policy discussions.