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The Commerce Commission has made a preliminary ruling against Fonterra, saying it must supply regulated milk to Kaimai Cheese Company and Grate Kiwi Cheese Company.
The commission stepped in to settle a dispute related to rules which require Fonterra to supply raw milk to independent processors.
Boutique Waikato producer Kaimai Cheese wanted Fonterra to deliver milk to nearby Open Country Cheese, which it contracted to pasteurise the milk.
Fonterra refused to supply the two companies on the grounds they were not processors of raw milk, and were not taking delivery of the raw milk at their own factories, the commission said.
Under the Dairy Industry Restructuring Regulations 2001, Fonterra has to supply 600 million litres of raw milk to independent processors during the 2008-2009 season.
Fonterra could agree on the cost with processors but the regulations provided a default price.
The commission's preliminary view was that Kaimai Cheese and Grate Kiwi Cheese were independent processors.
"Further, subject to the terms and conditions of regulated milk supply outlined in the regulations, Fonterra will be obliged to supply Kaimai and Grate Kiwi Cheese with raw milk to their nominated delivery points," the commission said.
The maximum regulated supply to any one processor is 50 million litres a season.
Fonterra had argued it was not required to supply Kaimai Cheese because that company did not process raw milk, nor was it required to deliver milk to Open Country Cheese on Kaimai's request and any delivery should count against Open Country Cheese's volume.
Fonterra said that under Kaimai Cheese's interpretation, anyone who carried out some processing of any kind of milk or dairy product could require the supply of 50 million litres of raw milk to Open Country Cheese at the regulated price each season.
A Fonterra spokesperson yesterday said once the company had completed a review of the draft determination it expected to make submissions.
Kaimai Cheese chairman Wyatt Creech said he was pleased with the decision.
"We never had any doubt that we were a processor of raw milk," he said. "We get the milk pasteurised from Open Country and bring it down and do the processing here."
Creech, a former Deputy Prime Minister, is also a director of Open Country Cheese, 400m from Kaimai.
Kaimai Cheese said it shared some shareholders with Open Country but the two operators were separate companies.
Kaimai Cheese started on January 7 and wanted to buy 10 million litres of raw milk from October 1.
The commission will be seeking submissions from interested parties on the draft determination.
"We believe we've got a very strong case," said Creech. "We've actually got a letter from Fonterra staff that visited us saying they were really impressed with our processing facility."
