12 Nov 2013

Fonterra write-off raises questions

7:09 pm on 12 November 2013

Fonterra's decision to write off $157 million from its inventory of value-added products raises questions about how Fonterra calculates its costs, a Massey University professor says.

The dairy co-operative said that was because of rising prices for its raw commodities such as whole and skim milk powders, which were used to calculate the farmgate milk price.

Professor of Agribusiness Hamish Gow said the write-off on products such as cheese and special ingredients was a paper loss only but it raised the issue of how Fonterra calculated its costs, particularly the price of the raw milk going into its value-added products.

"My perspective on this (is) it's a transfer pricing issue within Fonterra. Fonterra splits themselves basically into two components. One's their commodity products part of the business and then the other part is their value-added business," Prof Gow said.

"And there's a transfer pricing structure which they have between the two components."

The reference prices for the commodity products - what came out of Fonterra's factories in the form of products such as milk powder, skim milk and butter milk powder - had gone up on a global market.

That was then sold on open markets, and that set a reference price which they used to sell it to their other division, which was the value-added part of their business, Prof Gow said.

"The price for that has gone up, and that's put pressure on it," he said.

On Monday, Fonterra shares, which only farmers can own, fell 18 cents to $6.64 on the news. Units in the Fonterra Shareholders' Fund, which anyone can own, dropped 20 cents to $6.62.

Fonterra's latest payout forecast is for a milk price of $8.30 a kilo of milk solids and a 32 cents a share dividend.