US report backs Fonterra pricing

The dairy giant's approach is deemed fair amid pressure over retail milk cost. Photo / NZ Herald

As the dairy industry waits to see if the Commerce Commission will hold an inquiry into retail milk prices, a report commissioned by Fonterra says the way the dairy giant sets the farm-gate price is sound.

Fonterra has been coming under pressure from consumer advocates and rival processors on its milk prices, with calls for more transparency in how it calculates its wholesale prices and for more information on how they translate to the supermarket chillers.

A Consumer New Zealand survey found 79 per cent of Kiwis thought the Government should hold an inquiry into milk prices and 91 per cent believed milk prices were far too high.

As public concern over milk prices rose, the commission said it would rule this month on whether an inquiry into retail milk prices was needed.

Late last month, three Government ministries - Agriculture and Forestry, Economic Development and the Treasury - announced they had begun a separate inquiry into milk prices.

Fonterra commissioned the United States economic consulting firm Compass Lexecon to provide an economic evaluation of the competitive environment for dairy processing and also to review the methodology for calculating the milk price paid to Fonterra's farmer-shareholders.

A separate report commissioned by three Fonterra rivals - independent milk processors Open Country Dairy, Synlait Milk and new processing entrant Miraka - has suggested New Zealanders could be paying $195 million too much for milk from Fonterra each year.

That report - which suggested the way the firm's milk price was compiled meant it could be at least 15c too high for each 11.6 litres of milk - was given to the commission and to Parliament's commerce select committee.

Fonterra chief financial officer Jonathan Mason said the Compass Lexecon report essentially concluded that the New Zealand environment was fostering competition in the dairy sector and that the way Fonterra set its milk price was fair.

"The milk price reflects international dairy commodity prices, less the costs to produce and export those commodities," Mason said.

The report, given to Government officials last week , said there had been a growth in competition in the local industry under the Dairy Industry Restructuring Act. There had been a significant investment in expanded processing capacity in New Zealand by competitors as well as Fonterra since the farmer co-operative was formed.

The way Fonterra calculated its milk price - based on global prices for commodities, less the costs of a notional competitor - was correct, the report said. Domestic dairy prices had increased less than global prices for dairy products, largely because of the growth of supermarket home brands sold at a discount. Home-brand labels account for about 70 per cent of domestic fresh milk sales.

Compass Lexecon endorsed the fact that the Fonterra price was based on the costs of a notional competitor using efficient processing facilities, rather than actual manufacturing costs.

It noted considerable expansion of New Zealand dairy processing, with more efficient plant commissioned by Fonterra and competitors.

Fonterra has said it will reveal more on the drivers for its financial performance and its milk price.

MILK PRICE

* 79 per cent of people think the Government should hold an inquiry.

* Commerce Commission is to decide if a retail price inquiry is needed.

* Fonterra-commissioned report says the farm-gate price is sound.

- additional reporting NZPA

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