Fonterra over-pricing farm gate milk by 40-50 cents/kg, independents say

Monday 30th April 2012

Fonterra Cooperative Group is setting its farm gate milk price between 40 cents and 50 cents a kilogram more than its own commodity business could pay and still make an acceptable return, according to a submission by three independent processors.

The Independent Dairy Processors Group (IDPG) cited analysis by Deloitte that suggests Fonterra "funds an artificially high farm gate milk price via a cross-subsidisation of approximately $600 million per annum from its distributable profits."

The assessment was in IDPG's submission to the Dairy Industry Restructuring Amendment Bill, which is being considered this week by the primary production select committee.

The Deloitte estimate exceeds analysis by the Ministry of Agriculture and Forestry showing overpricing by Fonterra "was 30 cents kg MS in each of the past two years," IDPG said, citing a cabinet paper obtained under the Official Information Act.

By paying too much for farm gate milk, Fonterra's profits were "substantially lower than that of a group of international peers" and its share price was "artificially" lower, the group said. IDPG represents independent dairy companies Synlait, Open Country Dairy and Miraka.

It argues that Fonterra changed the way it set the farm gate milk price in 2006 to reflect what a "notional or imaginary super-competitor could pay", thus creating a distorted price. Before 2006 Fonterra set the price based on what an actual Fonterra commodity business could pay for raw milk while achieving a sensible return on capital, it said.

Deloitte's analysis shows the non-existent super-competitor "cherry picks" the best of Fonterra's scale and low cost of capital and independent processors' modern plant and "optimum product mix."

"Rather than resolving this problem, the amendment bill has the effect of parliament sanctioning the super-competitor and permanently locking in an artificially high farm gate milk price," the submission says.

"It's just common sense that Fonterra should be paying for milk based on the earnings of that milk," Synlait's John Penno, a spokesman for IDPG, said in the statement. "Allowing them to make internal transfers from returns on capital to subsidise milk prices makes no sense for anyone."

BusinessDesk.co.nz

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