Fonterra doesn’t make up the farmgate milk price, director Brent Goldsack says.
It is comprehensively and independently determined from the sales prices and revenue of the reference products.
“The milk price is set on actual returns from the world markets and subject to regulation under law,” he said in reply to an argument put forward by Massey University Academics James Lockhart and Hamish Gow that last season’s final price was too high.
They said a stubborn market and static or declining Global Dairy Trade results indicated a milk payout of $5.50 to $6/kg milksolids, not $6.70.
Goldsack, a dairy farmer and chartered accountant, is a member of the five-person Milk Price Panel charged with overseeing the application of the Milk Price Manual (MPM) to results and recommendations from Fonterra’s senior managers.
The other members are Fonterra independent directors Bruce Hassell and Scott St John (chairman) and Andrew Wallace and Bill Donaldson, appointed by the Fonterra Shareholders’ Council.
When the panel has governed the proper application of the MPM, which is a computer-based modelling exercise, the decision is made by the board, Goldsack said.
The Dairy Industry Restructuring Act (DIRA) requires the chairman and a majority of the members of the panel to be independent.
Forecasting the milk price during the season is difficult and Fonterra has considerable expertise invested in that procedure but at the end of the year the price is real, actual numbers and beyond conjecture.
The panel looks at anything that could move the milk price by 0.1c – a $1.5 million effect on the business – such is the degree of fine-tuning.
“The milk price mechanism has been a great thing for NZ dairy farmers. Because the model is so robust we can see the underlying performance of the business.
“It is laid out in the MPM and audited by the Commerce Commission and PricewaterhouseCoopers so there can’t be any jiggery-pokery.”
Goldsack is especially annoyed at the claim Fonterra’s inflated milk price is the sort of behaviour that resulted in the downfall and sale of Australian co-operative and market leader Murray Goulburn.
“That was emotive and irresponsible.”
Fonterra Australia was subject to the Australian Competition and Consumer Commission (ACCC) inquiry and cleared of everything because it had repeatedly warned the Murray Goulburn milk price wasn’t sustainable.
“NZ has an actual milk price and there is no borrowing to inflate it.
“The milk price is not determined by what Fonterra wants to pay. It is determined by the regulations in DIRA.”
Last season the net return on sales of the five reference commodities was $8.45/kg milksolids, net of tariffs.
From that was deducted $1.16 and 54c capital charge for interest, return on capital and depreciation.
More than 40% of the reference products are now sold off the Global Dairy Trade platform and the effect is to add more than 10c to the milk price.
But that doesn’t come from earnings. It is extra revenue from Fonterra’s commodity customers.
For the past three years the cost of processing a kilogram of milksolids has remained at $1.16.
“Fonterra has done an excellent job of restraining those processing costs.
“If inflation had been allowed to flow through since 2009, when we first started on the MPM, current processing costs would be 50c/kg higher or $750 million a year to Fonterra.
“A huge amount of work every day by thousands of Fonterra employees goes into maximising the milk price but not at the expense of earnings and that is more money for farmers.”
If Gow and Lockhart wanted to argue a structural change in world markets they should acknowledge NZ milk prices are now highly competitive with those in the European Union and the United States.
“In the past when Fonterra had a lower input cost for food service products, for example, there was more margin available when we competed to sell in China or wherever.
“That’s the structural change, if any, and we are yet to see if that sticks around and it is Fonterra’s job to make sure it does.”
Goldsack said Fonterra’s earnings performance in the 2018 financial year was incredibly disappointing and not one that should be repeated.
Earnings were affected by a rise in the milk price towards the end of the year – a 20c/kg MS rise would increase Fonterra’s cost of goods in higher value products by $350m, very difficult to recover in a short time.