Fonterra is keeping to the rules when it sets the price it pays farmers for their milk, the Commerce Commission says.
The commission has issued the initial results of a review into the dairy co-operative's pricing – a "dry run" for how part of dairy industry reform legislation will work once it is passed.
Fonterra and Federated Farmers have always maintained that Fonterra's setting of the milk price to farmers is fair and reasonable. They say traders' and retailers' margins are to blame for high supermarket prices.
Consumer NZ has been pressing for an inquiry into milk prices.
The commission said Fonterra's setting of the milk price to farmers was "not inconsistent" with the pricing regime set out in the Dairy Industry Restructuring Amendment Bill, currently before the primary production select committee.
"Most of Fonterra's current assumptions appear to be both practically feasible for Fonterra to achieve and reasonable for efficient processors to replicate," commission deputy chairwoman Sue Begg said.
"The assumptions do not preclude all efficient competitors from potentially competing with Fonterra in the New Zealand farmgate milk market, and will provide incentives for Fonterra to operate efficiently."
Fonterra strategy and economics manager Alex Duncan said the commission's report was important for the company as it proceeded with its Trading Among Farmers proposal.
It showed the Government, other stakeholders and potential investors that the milk price went through a thorough assessment by the board and the commission.
"They're not actually saying our milk price is right or wrong, because we're the ones who set the price, but they're saying it is consistent with the draft principles laid out in the bill."
The commission said it had identified areas requiring further information or analysis by Fonterra, and other areas where clarity could be improved.
Duncan said Fonterra would seriously consider those matters, which he described as technical issues around labour costs, cost of capital and tax depreciation.
Federated Farmers dairy chairman Willy Leferink said he was delighted with the commission's finding. "Fonterra can't have an issue like not having the milk price right in the eleventh hour of the Trading Among Farmers debate. It would be devastating. The whole TAF hinges on a stable milk price."
Under the bill, the commission would monitor and report on Fonterra's setting of the farmgate milk price, and Primary Industries Minister David Carter asked the commission to do a "dry run" to show how it would work.
Begg said it was important to understand that the bill and the dry-run review were not concerned with the retail price of milk, only the farmgate price.
"This is the price that Fonterra pays dairy farmers for their raw milk, and is worked out using a pricing methodology set by Fonterra. It is this pricing methodology – and Fonterra's application of it – that we are reviewing."
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