It bumped up its administration and overhead costs for the 2019 and 2020 seasons by $20 million in each year in calculating the milk price, the Commerce Commission’s final report on the 2019 milk price says.
It said the extra costs relate either to the failure to achieve efficiencies provided for in the 2015-16 setting of provisions for administrative and other overhead costs or to errors in the allocation process in 2015-16 when the regulator believed adjustments for the Velocity restructuring could be included as non-recurring items.
“It appears that up to $20m of the costs being reinstated relates to the original Velocity adjustments,” the commission said.
Fonterra has provided for an extra $90m of administration and overhead costs over two years as what a notional processor would spend to be efficient.
Of that, $45m in 2019 was recoverable but non-recurring and the other $45m was ongoing and recoverable in 2020.
The commission said Fonterra didn’t comply with its governing legislation by lodging the information after the July 1 statutory deadline.
Because of that tardiness the commission couldn’t decide whether those costs provided an appropriate incentive for Fonterra to operate efficiently.
It will take a more intensive look in the 2020 review.
The commission is required to test whether Fonterra calculated the milk price in line with legislative efficiency and contestability principles at the end of every season, as a means to ensure the country’s dominant milk processor isn’t abusing its market position.
Deputy chairwoman Sue Begg said Fonterra’s calculation was largely consistent with the law but it’s late filing of the administrative costs meant the regulator couldn’t form a view on whether they were appropriate.
She also said Fonterra’s asset beta – a component used to calculate the cost of capital – remains too high to be practically feasible.
A beta is a measure of the volatility, or systemic risk, of a security or a portfolio in comparison to the market as a whole. A lower asset beta allows a higher milk price to be paid.
The report noted Fonterra will commission a fresh review of the asset beta to be introduced in 2020-21. That would align with the proposed date of legislative changes.
Agriculture Minister Damien O’Connor tabled legislation to amend the Dairy Industry Restructuring Act limiting Fonterra’s discretion in setting the asset beta.
It will also spell out that Fonterra can pay a different farmgate milk price to its shareholder farmers from the base milk price. – BusinessDesk
