Fonterra pricing method backed by competition expert
The way Fonterra sets its farmgate milk price has been given the thumbs up by an internationally renowned competition expert.
The way Fonterra sets its farmgate milk price has been given the thumbs up by an internationally renowned competition expert.
In a report commissioned by Fonterra and produced for government officials, United States company Compass Lexecon said not only was the way Fonterra set its farmgate milk price sound, but competition in New Zealand dairy processing had actually increased since the co-op was formed.
Compass Lexecon was asked to provide an economic evaluation of the competitive environment for dairy processing and to review the methodology for calculating the milk price paid to Fonterra’s farmer-shareholders.
The company endorsed Fonterra's method of setting a milk price based on the costs of a notional competitor using efficient processing facilities, rather than its actual manufacturing costs.
It also noted that there had been considerable expansion of dairy processing in New Zealand since the co-op's formation, with more efficient plant commissioned by both Fonterra and its competitors.
“Even if Fonterra (and other processors) … have higher average variable costs of processing, the farm gate milk price will be bid up by competitors utilising efficient plants,” the report said.
“The history of actual expansion by both Fonterra and independent processors … indicates a strong belief by both Fonterra and competitors that they can secure a supply of raw milk at a price that allows them to operate profitably.”
Fonterra group chief financial officer, Jonathan Mason, said the milk price reflected international dairy commodity prices, less the costs to produce and export those commodities.
“We hope the high quality research done by such a respected international expert as Compass Lexecon will be helpful to officials reviewing these issues.”
Colin Williscroft
Fri, 22 Jul 2011
Fri, 22 Jul 2011
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Fonterra pricing method backed by competition expert
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