July 22, 2011

 

Fonterra will disclose secret milk price formula

 

 

For the first time, 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 big dairy co-operative said it will provide additional disclosure on its financial performance drivers, including more information about the milk price.

 

Fonterra, as collector and buyer of 90% 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 milk prices and various official inquiries under way, including by the Commerce Commission, into how the milk price is set. 

 

Although a copy had been made available to Government officials this year it would not be public until September, a spokesman said.

 

The company 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.

 

Fonterra's share trading among farmers proposal will require changes to the Dairy Industry Restructuring Act 2001, which the company answers to as well as the Commerce Act.

 

Under the plan, the public would have restricted investment opportunities through dividend-carrying units linked to Fonterra shares. Share ownership will remain however with farmers.

 

As well as being a contentious issue this year for consumers and processors which buy raw milk from Fonterra, the milk price is under policymakers' scrutiny because of the tension that will result under the share trading proposal between how much Fonterra will pay its shareholding farmers for milk, and how much will be available for dividends. Shareholding farmers will require the milk payment to be maximised while unit holders will seek robust dividends.

 

Fonterra had hoped to have enabling legislation for share trading through before the election but the Government has shelved the issue until next year because of a crammed legislative timetable.

 

Fonterra will announce its annual results for the year ended July 31 on September 22.