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Fonterra chief executive Andrew Ferrier says the dairy giant has "reservations" about the Government's move to force it to send more raw milk to rival processors at cost price.
"We are concerned that Fonterra's competitors, who have access to their own supply, are taking advantage of the situation to acquire cheap milk to compete against us internationally," he said at the weekend.
"We are of the firm opinion that these competitors should not have guaranteed access to Fonterra's milk supply in the long term."
Fonterra is required by law to supply rival companies with 400 million litres of milk - about 2.7 per cent of its milk supply - at cost price each season, but this season will have to kick in an extra 100 million litres.
The regulations do not say what should happen when demand exceeds the 400- million-litre threshold, but this season's 400 million litres is expected to run out in February.
NZ Dairy Foods, a major rival without its own farmers, gets 250 million litres, and Open Country Cheese and the Tatua co-operative each take 50 million litres, with a further 50 million litres split between many small companies.
Agriculture Minister Jim Anderton said last week that for the 2007-2008 season, Fonterra would be required to supply up to 500 million litres of raw milk at the regulated price, and that next year, for the 2008-2009 season, this volume will rise again to 600 million litres.
The Dairy Industry Restructuring Act enables the Government to regulate up to 5 per cent of the milk that Fonterra collects - equivalent to about 750 million litres this season - but Anderton has signalled that rival processors with their own suppliers may not be able to count on continuing access to cost-price Fonterra milk.
"There can be no guarantee that those processors with their own milk supply who are competitors of Fonterra will continue to have access to Fonterra's milk supply in the longer term," he said.
Any move to cut off the flow of cost-price Fonterra milk to processors with their own farmers will hit Open Country Cheese at Waharoa in the Waikato and the tiny Tatua co-operative, near Morrinsville, the hardest.
In May, Fonterra lost a long-running court case in the highest court of the land, when the Supreme Court effectively ruled it had been overcharging its small rivals for raw milk.
The Commerce Commission took the action to ensure that Fonterra followed the Dairy Industry Restructuring (Raw Milk) Regulations 2001 in calculating its "default milk price" - the basis for pricing raw milk supplied to rivals.
After losing to the Commerce Commission, Fonterra immediately said it would ask the Government to change the regulations.
Fonterra has complained that both Open Country Cheese and Tatua have their own milk suppliers and can get as much milk as they need without using the regulations. It said both companies paid less for the milk from Fonterra than they paid their own suppliers.
Ferrier said: "We have always believed that it was not in the spirit of the regulations to have Fonterra's farmers subsidising those companies who have access to their own supply of milk and we look forward to this anomaly being reviewed as soon as possible."
Anderton said the demand for milk under the regulations was topping 400 million litres for the first time. "The Government and the industry are increasingly aware that these regulations are under severe pressure."
Anderton said he did not know if Fonterra was correct in saying that the regulated price was too cheap. "But the fact that some processors continue to buy milk under the regulations, despite having their own suppliers, indicates that it's worth looking into".
The proposed review led by Ministry of Agriculture and Forestry officials will re-assess the pricing mechanism and will finish by July 31, 2008, in time for the law to be changed for the 2009-2010 season.
- NZPA
