Farmgate Milk Price is calculated by:
- Determining the revenue that Fonterra would earn if the equivalent of all the milk Fonterra collects was converted into commodity specifications of whole milk powder (WMP) and skim milk powder (SMP), and their by-products which are buttermilk powder (BMP), butter and anhydrous milkfat (AMF). These are the products that currently make up the ‘Reference Commodity Products’. Prices largely reflect US dollar prices achieved on the twice-monthly GlobalDairyTrade (GDT) trading events, converted to New Zealand dollars using Fonterra’s actual average monthly foreign exchange conversion rate.
- Deducting costs, including the cost of transporting raw milk to factories, and the cost of efficiently manufacturing Reference Commodity Products and then transporting them to the point of export from New Zealand, along with selling and administration expenses. They also include an amount for depreciation of fixed assets and an appropriate return on investment, including investment in working capital. To the extent feasible and where doing so is consistent with the Farmgate Milk Price Principles, costs are derived from Fonterra’s actual costs associated with these activities.
The balance comprises the aggregate amount payable to farmer shareholders. This is an aggregate amount but is usually referred to on the basis of a Farmgate Milk Price per kgMS.
The Farmgate Milk Price methodology has been reviewed by competition experts Compass Lexecon, as described in the media release International Experts Endorse Fonterra Milk Price Formula.