Fonterra unhappy with milk ruling

David Matthews. Photo / Supplied

Dairy giant Fonterra may appeal against a regulatory decision that forces it to supply million of litres of milk to smaller rivals.

The Commerce Commission last week ruled that Kaimai Cheese Company and The Grate Kiwi Cheese Company were independent processors and were entitled to be supplied milk by Fonterra under the Dairy Industry Restructuring (Raw Milk) Regulations 2001.

Fonterra supplied 440 millon litres of raw milk under the regulations during the 2008-09 season, with a maximum of 50 million litres to any one processor or in the case of Goodman Fielder 250 million litres.

The cost of the regulated milk could be agreed with processors but the regulations provided a default price.

Fonterra general counsel David Matthews said the company did not agree with the Commerce Commission decision.

"Fonterra believes that this complaint has resulted from the availability of subsidised milk which has encouraged Kaimai, Grate Kiwi and Open Country to devise a plan to obtain more subsidised milk than they would normally be allowed under the regulations," Matthews said.

The Ministry of Agriculture and Forestry last year reviewed the pricing formula and confirmed that the regulated milk price enabled independent processors to access milk at a lower cost than to Fonterra itself, he said.

"Since then MAF has been working on a way to rectify that position."

Fonterra forecast the "subsidy" given away for the 2008-09 season would be about $10 million.

The Commerce Commission's decision would increase the ability of independent processors to get subsidised milk, Matthews said.

"This is money our farmers just cannot afford," he said.

Fonterra was considering an appeal.

"However, the key thing that needs to happen is for the Government to fix the pricing under the regulations and remove the subsidy."

The disputes concerned the definition of an independent processor as outlined in the act and whether an independent processor could contract a third party to do initial processing of milk.

Kaimai had applied for about 10 million litres of regulated milk for the 2008-09 season and asked for it to be delivered to Open Country who had agreed to do some of the processing steps. Grate Kiwi applied for 50 million litres of milk and proposed having Open Country manufacture its cheese.

The Commerce Commission ordered Fonterra to pay compensation to Kaimai and Grate Kiwi for losses from not receiving milk under the regulations from October 1 last year.