Thursday, March 28, 2024

MPI ponders milk price options

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The review of the Dairy Industry Restructuring Act (DIRA) might provide a chance to boost confidence in Fonterra’s base milk price calculation, the Ministry for Primary Industries has suggested.
As expected with lower milk prices and high margin costs, milk production has begun to ease over the past few months
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That, in turn, would further improve the effectiveness of the DIRA regime.

“Fonterra’s dominance means that its milk price effectively sets the default price all dairy processors have to match or better to attract and maintain supply from farmers,” MPI said in its public consultation document on the DIRA.

The DIRA provides the framework for transparency and confidence in the base price but also allows Fonterra to pay a different price if it needs to, as long as the reasons are disclosed.

The contestability standard for the base milk price means it should be high enough to incentivise Fonterra to be more efficient and low enough to ensure it is practically feasible for an efficient processing competitor.

The loaded phrase practically feasible has been much debated over the years and is investigated annually by the Commerce Commission.

MPI wonders if the DIRA could be amended to further improve confidence in the base milk price calculation outcomes.

Some stakeholders want the commission to set the base milk price.

MPI said three options were identified:

Status quo for the balance of Fonterra calculation and commission monitoring;

DIRA amendment for more guidance on the meaning of the term practically feasible or;

DIRA to give the commission power to set the base milk price for the whole industry.

In discussing the first options MPI said the commission is not convinced Fonterra is using an appropriate asset beta in risk calculations and Fonterra hasn’t yet agreed to change it.

Confidence in the system is to some extent dependent on how Fonterra is going to respond to the commission’s concern.

Concerning option two, trying to introduce further legislative principles would be very difficult and possibly lead to unintended consequences, MPI said.

“The issues are highly contentious and require high levels of regulatory economics expertise and judgment.”

But making the commission set the base milk price has considerable costs and risks, MPI said.

“It would involve the commission building and running an independent pricing model for the dairy industry, with the associated significant administrative costs and risks of regulatory error.”

Therefore, having raised the issue of confidence in the base milk price system MPI has not found a workable answer.

Submissions on the DIRA review must be received by MPI by February 8, after which it will take February and March to analyse the submissions and make recommendations to the Government in April.

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