Review of the Dairy Industry Restructuring (Raw Milk) Regulations: Clarifying industry concerns and the Regulations’ intent
Appendix A: Pricing formula in the Raw Milk Regulations
The regulated or “default” price for raw milk in a season is determined by the following formula, as set out in regulation 8(6) of the Raw Milk Regulations:
Price (per kilogram of milk solids) is:
(total payout + [Fonterra] retention – annualised share value)
kilograms of milk solids
where:
• total payout means the total payment made by [Fonterra] … to shareholding farmers for raw milk supplied by them in that capacity in a season, minus the total winter milk premium for that season.
• [Fonterra] retention:2
− means the after-tax profit of [Fonterra] for a season that is retained by [Fonterra] and not paid to shareholding farmers; but
− does not include retentions for abnormal or extraordinary asset revaluations or write-offs
• Annualised share value3 in relation to a season, is the amount of a perpetual annuity that has a net present value equal to the sum of:
− the price of a cooperative share as at 1 June in the season, multiplied by the total number of cooperative shares as at that date; and
− the peak note price multiplied by the total number of peak notes as at 1 June in the season.
Extra costs for transport, organic milk and winter milk
In addition to the price determined above, an independent processor buying milk at the regulated or “default” price must pay:
• the reasonable cost of transporting the raw milk to the independent processor (section 8(5)(a) of the Regulations); and
• additional costs for either organic milk or winter milk (refer to sections 8(5)(b) and 8(5)(c) of the Regulations).
2 The Commerce Commission and the Court of Appeal have each ruled on aspects of the “retention” component. As discussed, the Regulations Review Select Committee has also looked at one aspect of this component.
3 As noted earlier, the Supreme Court recently considered how the “annualised share value” component should be calculated. The Court found that this value must be calculated by using a cost of equity capital rate, rather than a weighted average cost of capital rate.
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