Amendments to the Dairy Industry Restructuring Act (DIRA) 2001 last year require the commission to conduct two reviews each milk season. The first review calls for a report on the extent to which Fonterra’s milk price manual is consistent with the purpose of the milk price monitoring regime.
The manual determines how Fonterra calculates the farmgate milk price, the price paid by Fonterra to dairy farmers for their raw milk. The second review requires a report on the extent to which the assumptions adopted and the inputs and process used by Fonterra in calculating the base milk price for the season are consistent with the purpose of section 150A of the legislation. This legislation promotes the setting of a farmgate milk price that provides an incentive to Fonterra to operate efficiently and the provision of contestability in the market for the purchase of milk from farmers.
The commission’s final report was released just before Christmas, with the manual passing muster but with caveats. It was not inconsistent with the purpose of the DIRA milk monitoring regime, commission deputy chair Sue Begg said.
“There are a couple of elements that we consider are not fully consistent with the efficiency aspect of the purpose, but they only have a minor impact.”
The review team could not form a view on three matters it regards as “potentially material” – the regions where plants are assumed to be added, the calculation of milk collection costs, and the treatment of assets that are no longer required.
These and some other matters about which the manual is not specific will be examined again in the second review, to be published in mid-September, when the commission will look at how Fonterra has applied the milk price manual to calculate the milk price.
The manual has been heavily examined in recent months, with the August release of the commission’s report on its non-statutory, dry-run review of how Fonterra sets its farmgate milk price. The report on the second statutory review of the season must be published by September 15.
This is the job for which a registration of interest has been invited before the commission selects a short list of prospects, who will be asked to submit fuller proposals.
A range of advice was sought in technical areas such as engineering expertise, dairy processing, packaging capability, cost analysis, analysis of variable manufacturing costs other than energy costs and packaging costs and milk collection costs, benchmarking of operational costs and finance expertise, for an analysis of the cost of capital.
The deadline for responses was December 21.