ComCom not happy with Fonterra

The Commerce Commission has criticised Fonterra for the way it adjusted its 2013-14 milk-price payout to farmers downwards from $8.95 to $8.40 per kilogram of milksolids.

"The way Fonterra is calculating and applying its adjustment to the base milk price is not consistent with incentives for the company to operate efficiently," the commission's deputy chairwoman, Sue Begg, said.

"Fonterra is setting a lower price to cancel out the adverse effect of a number of unanticipated events that would otherwise have had a negative impact on its profits."

The commission's decision was a draft one and interest groups, including Fonterra, had until September 1 to make submissions, she said.

The final report would be released on September 15.

The commission reviews each year the extent to which Fonterra's milk-price manual is consistent with the way it sets its price.

"This ensures that the way Fonterra goes about setting its prices are made clear to people," Begg said.

"The manual describes how it's going to go about setting the price, then when it does calculate the price it describes how it has done that.

"When it makes a decision like it has done this year to set the price in a different way, it has to disclose that," she said.

Fonterra said it welcomed the draft report "which confirms Fonterra's view that it faced an unprecedented and one-off set of events in the 2013-14 season".

The 2013-14 season was a boomer one for the dairy industry. However, Fonterra was unable to process large supplies of milk into high-value powder, partly because it did not have sufficient plant.

As a result, the extra milk was used in lower-value butter and cheese.

Fonterra chief financial officer Lukas Paravicini said the decision to announce a forecast price lower than that calculated under the milk-price manual was made in the best interests of the co-operative. A higher price would have been more than the company could afford and would have required borrowing.

Federated Farmers dairy chairman Andrew Hoggard said Fonterra's hands were tied over the issue.

"The milk-price manual is based on a theoretical model," Hoggard said.

"In theory if they had have done what a highly efficient competitor would have done they should have paid $8.95."

There was nothing to suggest that Fonterra had not paid out to farmers what it had earned, nor was there anything to suggest it was inefficient, he said.

Begg agreed, saying the commission was not suggesting Fonterra was inefficient, but that it had to act in a transparent manner so stakeholders were fully informed.

Hoggard said the commission's findings did not seem very severe "at least in my farmer language but it might in bureaucratic language".

It raised the question about whether Fonterra should be made to include some form of reporting about how it arrived at its price, he said.

Paravicini said Fonterra was accelerating its investment in new plants by $400 million to $500m to cater to the volatility of milk production.

"This additional capacity will give us a lot more manufacturing flexibility so we can take the best advantage of relative market prices, including during the peak," Paravicini said.