New Zealand’s competition authority has said that Fonterra’s estimate of risk in calculating the cost of financing milk processing operations is too low, resulting in the company calculating a higher milk price than its competitors.
The Commerce Commission said that the impact of this is that “Fonterra calculates a higher milk price than would be the case if it used a more feasible allowance for risk in the cost of finance, consistent with other processors”.
The cost of financing – also known as the cost of capital – feeds into the calculation of the milk price Fonterra pays its farmers.
Under New Zealand’s Dairy Industry Restructuring Act, the Commission administers a milk price monitoring regime as Fonterra has market power over the purchase of farmers’ milk.
Commerce Commission deputy chair Sue Begg said: “For several years now Fonterra has been unable to provide sufficient evidence to convince us that using a lower asset beta than comparable processors is justified.”
The asset beta is used to calculate the cost of financing milk processing operations, and in turn affects the milk price Fonterra pays its farmers. It reflects the extent to which the assets associated with processing milk are more or less risky than the stock market as a whole.
Begg said: “We acknowledge that estimating the asset beta with reliability and confidence is difficult. 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’s asset beta of 0.38 is not practically feasible.
“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.”
The New Zealand Herald quoted Fonterra as saying: “The co-op stands by its view that the cost it attributes to its assets is accurate and this view is backed by independent expert analysis.”
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