Fonterra Co-operative Group Limited · NZX:FCG
Fonterra Co-operative — Investor Presentation (August 2014)
28 slides from Fonterra Co-operative's investor presentation, Aug 15, 2014
Slide 1: Review of Fonterra's 2013/14 Base Milk Price Calculation
Commerce Commission Review of Fonterra’s 2013/14 Base Milk Price Calculation 15 August 2014 Sue Begg, Deputy Chair
Slide 2: Overview
Overview • Summary of draft conclusions • Milk price monitoring regime • Fonterra’s calculation of base milk price • Adjustment amount • Our draft conclusions • Longer term implications • Our process and next steps 2
Slide 3: Summary of draft conclusions
Summary of draft conclusions • Together, the assumptions, inputs and process used to calculate 2013/14 base milk price are not consistent with regime’s purpose • Fonterra has not calculated the 2013/14 base milk price consistent with the efficiency dimension of the regime’s purpose • Key issue is th
Slide 4: DIRA's milk price monitoring regime
DIRA’s milk price monitoring regime • Dairy Industry Restructuring Act 2001 (DIRA) milk price monitoring regime introduced in 2012 • Regime intended to provide greater transparency in the way Fonterra sets the ‘base milk price’ • This is a monitoring regime – largely disclosure obligations • Legisla
Slide 5: Base milk price
Base milk price • ‘Base milk price’ is the term in DIRA for Fonterra’s farm gate milk price • Monitoring regime not about price for processed milk 5
Slide 6: Monitoring regime's purpose
Monitoring regime’s purpose • To promote the setting of a base milk price that provides an incentive to Fonterra to operate efficiently while providing for contestability in the market for the purchase of milk from farmers • Contestability is considered to be provided for if any notional costs, reve
Slide 7: Legislative requirements
Legislative requirements • Fonterra is required to provide us with: • Milk Price Manual setting out how the base milk price is to be calculated for the coming season • Assumptions adopted, and inputs and process used, in calculating the base milk price for the preceding season • Each year we review
Slide 8: Calculation is based on notionals
Calculation is based on notionals • Under DIRA, Fonterra is expected to calculate the base milk price using the revenues and costs of a notional milk processing business • Notional revenues based on sale of reference commodity products • Reference commodity products are: whole milk powder, skim milk
Slide 9: How Fonterra sets the milk price
How Fonterra sets the milk price 9
Slide 10: Significance of each component
Significance of each component 10
Slide 11: How we review the calculation
How we review the calculation • We review each of the components that go into the base milk price calculation and ask these questions • Efficiency: is the component notional or actual? • When the base milk price is calculated using notional data, Fonterra’s own efficiency performance will affect its
Slide 12: 2013/14 Adjustment Amount
2013/14 Adjustment Amount • In previous years, Fonterra has paid a base milk price consistent with its Milk Price Manual • For 2013/14, Fonterra intends to adjust the Manual-consistent milk price down by an Adjustment Amount • $8.95/kgMS Manual-consistent price, 55c/kgMS Adjustment Amount, $8.40/kgM
Slide 13: 2013/14 Adjustment Amount
2013/14 Adjustment Amount • Reference commodity products were much more profitable than products Fonterra was actually able to make • Its actual asset footprint meant it was unable to produce the same mix of high return products • Fonterra faced high costs dealing with milk flows at season peak • Li
Slide 14: 2013/14 Adjustment Amount
2013/14 Adjustment Amount • DIRA allows for Fonterra to set a base milk price different from the Manual-consistent price • If so, Fonterra must make its reasons publicly available • Reasons included in Fonterra’s 2013/14 ‘Reasons paper’ – its report to us on assumptions, inputs and process used in t
Slide 15: Our overall draft conclusions
Our overall draft conclusions • Together, the assumptions, inputs and process used to calculate 2013/14 base milk price are not consistent with regime’s purpose • Fonterra has not calculated the 2013/14 base milk price consistent with the efficiency dimension of the regime’s purpose • Fonterra has c
Slide 16: Draft conclusions – efficiency
Draft conclusions – efficiency • Fonterra has not set the 2013/14 base milk price consistent with the efficiency dimension of the regime’s purpose • Efficiency incentive provided when Fonterra’s profitability depends on whether it is more or less efficient than notional producer • Adjustment Amount
Slide 17: Draft conclusions – contestability
Draft conclusions – contestability • Fonterra has set a base milk price consistent with the contestability dimension of the regime’s purpose • This year’s downward adjustment to the Manual-consistent price is sufficiently large (55 cents/kgMS) that the assumptions, inputs and process used should, in
Slide 18: Draft conclusions – if no adjustment
Draft conclusions – if no adjustment • We also present our draft conclusions for the 2013/14 base milk price calculation without the milk price adjustment • Efficiency: use of mostly notional data to set the Manual-consistent price would be consistent with providing incentives for Fonterra to operat
Slide 19: Draft conclusions – if no adjustment
Draft conclusions – if no adjustment • Conclusion on contestability dimension if no adjustment • One component of the base milk price, energy costs, is not practically feasible • We are unable to reach a conclusion for fixed asset values and asset beta • No cost allowance appears to be made for the
Slide 20: Longer term implications
Longer term implications • The milk price monitoring regime provides a ‘snapshot’ of a single year’s base milk price against the regime’s purpose • Further work is planned to resolve outstanding issues from this year’s review for our 2014/15 review • We have suggested Fonterra consider making an all
Slide 21: Longer term implications
Longer term implications • A single year’s negative finding on the efficiency dimension might not be a significant concern because many other factors provide incentives for Fonterra to operate efficiently • Fonterra is allowed to adjust the base milk price but doing so might reduce predictability fo
Slide 22: Our process and next steps
Our process and next steps Process paper released 9 June 2014 Comments on process paper received 20 June 2014 Receipt of Fonterra’s Reasons paper 1 July 2014 Submissions received on Reasons paper 15 July 2014 Draft report released 15 August 2014 Submissions on draft report due 1 September 2014 Final
Slide 23: Any questions?
COMMISSION NEW ZEALAND Komi Tauhokohoko (>> COMMERCE Any questions? - Wa COMMERCE G COMMISSION NEW ZEALAND Te Komihana Tauhokohoko
Slide 24: Contact us
Contact us Call: 0800 943 600 Write: PO Box 2351, Wellington 6140 Attn: Tricia Jennings Email: Tricia Jennings, Project Manager regulation.branch@comcom.govt.nz Website: comcom.govt.nz 24
Slide 25: Additional background: our interpretation of the efficiency and contestability dimensions
Additional background: our interpretation of the efficiency and contestability dimensions 25
Slide 26: Our interpretation of the purpose
Our interpretation of the purpose • We have interpreted the primary focus of the efficiency dimension of the regime’s purpose to be on improving incentives for Fonterra to drive cost efficiencies (ie, productive and dynamic efficiency) • Fonterra will have a greater incentive to operate efficiently
Slide 27: Our interpretation of the purpose
Our interpretation of the purpose • We have interpreted the contestability dimension of the regime’s purpose to be satisfied if the assumptions adopted, and inputs and process used in setting the base milk price are practically feasible for Fonterra or another processor that is efficiently building
Slide 28: & COMMERCE
& COMMERCE - COMMISSION NEW ZEALAND Y Te Komihana Tauhokohoko
Fonterra Co-operative Group — Investor Presentation (August 2014) on 6ix