In its submission to the Dairy Industry Restructuring Act review Synlait highlighted what it calls a widely held concern Fonterra can manipulate its competitive position through overvaluing the milk price and undervaluing the share price.
It cited comments from former Fonterra chairman John Wilson and Shareholders’ Council chairman Duncan Coull that the Milk Price Model has been changed to move 40-46c/kg from earnings to the farmgate milk price.
Another example was a 20c rise in the milk price in May 2018 that Synlait and market analysts couldn’t justify on commodity prices alone.
A Fonterra Shareholders’ Council-commissioned report said the cumulative effect of changes in the farmgate milk price since 2009 is plus 51.8c/kg.
“The system enables Fonterra to make unilateral and arbitrary choices about the allocation of earnings between milk price and capital,” Synlait said.
Across the industry 50c/kg amounts to $750 million misallocated to farm income at the expense of returns on value-adding investments beyond the farmgate.
That is enough to distort land values, encourage dairy conversions, increase the use of marginal inputs like nitrogen and palm kernel and disincentivise value-add investment.
Synlait argues the Commerce Commission audit of the milk price under DIRA was ineffectual, the notional producer model is a sort of impractical super-competitor and Fonterra sets its asset beta risk factor too low.
Independent processors work in the dark during the season and find out in September retrospectively how the milk price model has been applied.
Synlait proposes some measures to improve transparency, including attestation by the milk price panel and the Fonterra board that the farmgate milk price meets the objectives of the DIRA each time.
It also suggests the appointment of two independents to the milk price panel and the publication of meeting minutes and a sort of dashboard of changes to key components and assumptions.
It also wants the commission to have more regulatory powers under the DIRA but not to set the milk price.
Synlait called for open entry and exit to Fonterra to be retained in the DIRA but that it could refuse to collect milk from conversions on marginal dairying land.
Surprisingly, Synlait said Fonterra’s obligation to provide up to 250m litres annually to Goodman Fielder should be repealed because it prevents the development of a wholesale milk market.
Synlait’s submission was made by chief executive Leon Clement, until recently a long-time Fonterra senior executive and the former head of Fonterra Brands NZ, the domestic dairy products division.
