The commission’s deputy chairwoman, Sue Begg, said in a statement that for several years the co-operative has been unable to convince the Commission it was justified in using a lower asset valuation calculation, or beta, than other processors.
This calculation was reflected in a higher milk price paid to farmers but the report did not say by how much the calculation inflated the milk price.
The commission monitored the setting of the milk price under the Dairy Industry Restructuring Act and incentivised Fonterra to operate efficiently in the absence of what it said was an uncontested market for milk.
“Having considered the information available, our emerging view is that an efficient processor with similar risk exposure to the notional producer is unlikely to have an asset beta as low as Fonterra’s estimate of 0.38, and on balance we consider that this beta estimate is therefore not practically feasible,” the report stated.
The commission acknowledged the difficulty of accurately and reliably calculating a beta value, but noted a study of 39 dairy companies completed for the Commission found they used beta ranges from 0.48 to 0.58, higher than Fonterra’s 0.38.
“However, after considering all available information, including submissions on the independent report we released in April on the subject, our emerging view is that Fonterra’ asset beta of 0.38 is not practically feasible,” Begg said.
“We acknowledge there are differences between the risks borne by Fonterra and other comparable producers. However, based on the evidence we have, we do not consider the differences in the risks are sufficiently material or relevant to justify using an asset beta of 0.38.”
Fonterra Shareholder’s Council chairman Duncan Coull said outside scrutiny of the milk pricing model gave him comfort, given New Zealand was the only country in the world where the setting of the milk price was transparent.
The commission report highlighted just how technical asset beta technology was.
“So long as the principals are being applied consistently across multiple years, then that gives me comfort as a farmer.”
The commission was seeking submissions on its report.
Also this week, Fonterra received an extraordinary broadside from Regional Economic Development Minister Shane Jones, who accused its leaders of meddling in politics, and underperformance.
He said the co-operative needed to be restructured and that chairman John Wilson should join his former chief executive Theo Spierings and resign.
Speaking in Parliament after attending a meeting that included Fonterra at National Field Days, which was closed to the media, Jones was reported as saying he was disappointed in Fonterra, saying it behaved bigger “than what their writ really is,” and was not accepting there was a new government.
Jones said Wilson should focus less on politics “and more on justifying the money they’ve lost overseas”.
“I believe that they have become disconnected from the farming community and I said in front of Mr John Wilson that I have requested the Minister of Agriculture – when he looks at his dairy restructuring – identify the issues and whether or not it’s time for us to look at a restructuring of Fonterra,” Jones said.
Wilson did not immediately respond to the attack.
