Fonterra has resubmitted its 0.38 asset beta is appropriate and results in a milk price that enables it to be competitive in the raw milk market – what is often called Fonterra’s milk market share.
It disagrees with higher asset beta values (0.45 to 0.58) the commission calls “emerging views” on the appropriate level.
An earlier report by Cambridge Economic Policy Associates (CEPA) said Fonterra’s asset beta is too low and a proper assessment of its own risks will result in it paying less to farmers for their milk to strengthen its balance sheet.
The commission called for responses to the emerging views paper and those from Fonterra, Open Country Dairy, Synlait, and Westland Milk Products have been released.
Fonterra has argued for a low asset beta in risk assessment because as a co-operative its farmers are effectively its financial backstop.
An asset beta figure is a statistical measure of a company’s risk profile compared to its peers or the market in general.
Raising the asset beta input to risk assessment is likely to take 3-5c/kg off the milk price, it has been estimated.
That might improve earnings and potentially dividends, from which farmer-shareholders would benefit.
Lower milk prices might also favour processing competitors, particularly those who buy raw milk from Fonterra.
Fonterra argues the commission should accept estimating the beta is uncertain and there is no perfect milk price that promotes efficiency and contestability.
Open Country Dairy said Fonterra has been getting away with a low asset beta estimate for years, during which about $440 million has been misallocated to farmers at the expense of shareholders.
That is not consistent with the purpose of the Dairy Industry Restructuring Act (DIRA).
Fonterra’s own estimate was so far outside the plausible range that it lacked any semblance of credibility, Open Country said.
Synlait simply said it agrees with the emerging view from the commission that an asset beta of 0.38 is not practically feasible for an efficient processor.
Westland also agreed with the commission’s view the beta level of 0.48-0.52 used by comparator international milk processing companies is more appropriate.
The commission’s role is to review the annual milk price calculation to ensure it is consistent with the DIRA.
It expects to publish a draft paper in mid August and a final paper in mid September.
