Fonterra’s basis for setting milk price under question
WELLINGTON: Advisory firms that looked into the ‘‘asset beta’’ Fonterra uses to determine the farmgate milk price say it may be too low, meaning its farmershareholders are receiving a bigger payout than warranted under the company’s enabling law.
The Commerce Commission hired Cambridge Economic Policy Associates (CEPA) and Freshagenda to establish whether Fonterra’s proposed approach to estimating the asset beta for a ‘‘notional processor’’ — as set out in the Dairy Industry Restructuring Act 2001 (Dira) — is appropriate.
The Act sets out an approach to calculating the farmgate milk price paid by Fonterra, to ensure New Zealand’s dairy markets are efficient and contestable in the face of Fonterra’s market dominance.
A lower asset beta allows a higher milk price to be calculated.
Last month Fonterra lifted its forecast farmgate milk price to $6.55 per kilogram of milk solids from the $6.40/kg ms it projected in December, reflecting the improvement in global dairy prices since then.
Under Dira, the commission conducts an annual review of the milk price ‘‘manual’’ that Fonterra uses to calculate its base milk price each season.
Beta is a measure of the volatility, or systemic risk, of a security or a portfolio in comparison to the market as a whole, according to Investopedia.
A beta of less than 1 suggests the security is theoretically less volatile than the market. Utility stocks typically have a beta of less than 1, which is important for Fonterra because the beta it advocates, of 0.38, is based on a sample of electricity lines businesses.
Its adviser, Auckland UniServices, argues that the systemic risk for the notional processor is lower than for companies in the same broad sector as ‘‘as the cash flows, and therefore asset beta, of the business are more similar to that of a price capped/revenue capped business, such as an electricity lines business,’’ the report says.
The commission is seeking feedback on the report by 5pm on May 9 and will then confirm the next steps for its review of this year’s milk price calculation.
The Government has put on hold an amendment to Dira that had been prepared by the previous Nationalled administration. — BusinessDesk