Milk pricing defined
Fonterra will soon make public its secret formula for setting the milk price as it prepares for share trading among its farmers. In the first issue of a new monthly shareholder update, the co-operative said it would provide extra disclosure on financial performance drivers, including more information about the milk price.
Fonterra, as collector and buyer of 90 per cent of the raw milk supply, sets by default the national milk price at farmgate and wholesale and, to a large extent, retail levels. The methodology for the milk price is contained in a manual, only part of which is public, and even then only to Fonterra farmers on the restricted website Fencepost.
Its secrecy has fuelled concern amid high prices and various official inquiries under way, including by the Commerce Commission, into how the milk price is set. A copy had been made available to Government officials this year but it would not be public until September, a spokesman said.
Fonterra also plans an expanded management discussion and analysis commentary in its annual reports and an annual statement of compliance with the manual. This statement will include disclosures of relevant building blocks of the milk price calculation and an independent audit opinion. A booklet explaining how the milk price is calculated will also be published.
The plan for share trading among farmers will require changes to the Dairy Industry Restructuring Act 2001, which the company answers to as well as the Commerce Act. The public would have restricted investment opportunities through dividend-carrying units linked to Fonterra shares. However, share ownership will remain with farmers.
As well as being a contentious issue this year for consumers and for processors which buy raw milk from Fonterra, the milk price is under scrutiny because of the tension that will result under the share trading plan between how much Fonterra will pay its shareholding farmers for milk and how much will be available for the company’s dividends. Shareholding farmers will require the milk payment to be maximised. Unit holders want robust dividends.