The commission obtained a report from Cambridge Economic Policy Associates (CEPA) and Australian-based dairy analyst Freshagenda into the “asset beta” used in the milk price model.
Submissions will now be received by the commission until May 9.
Last year when reporting on Fonterra’s base milk calculation under the Dairy Industry Restructuring Act (DIRA) the commission said it was unable to decide on the feasibility of the estimated asset beta Fonterra used to determine the weighted average cost of capital (WACC).
The WACC is an important component of milk price setting, a concept familiar to Fonterra farmers through the capacity adjustment in the advance payments schedule.
The commission said then the difference between Fonterra’s estimate and average comparable companies was material and equal to about 5c/kg MS.
An asset beta figure is a statistical measure of a company’s risk profile compared to its peers or the market in general.
A figure of 1 denotes equivalence, less than one a lower risk.
It has been alleged Fonterra’s use of a low asset beta (0.38) allows a higher milk price to be calculated – farmers would be consistently getting too much in milk price at the expense of net earnings and share dividends.
Other milk companies that benchmark from Fonterra or buy raw milk from Fonterra could be paying too much and therefore Fonterra was behaving uncompetitively.
The advisory report came up with 0.45 to 0.58 as the asset beta range for other dairy companies.
It also acknowledged Fonterra was different and that price risks were effectively passed on to its farmers, which might indicate a lower asset beta.
CEPA and Freshagenda conclude the evidence from comparable companies suggests a higher asset beta should be used.
“While our recent reviews have found the way Fonterra sets its milk prices is largely consistent with the DIRA we continue to be concerned that Fonterra has not provided sufficient evidence to support using an asset beta lower than that of comparable processors,” commission deputy chairwoman Sue Begg said.
