Cheap milk for Fonterra competitors

The Commerce Commission has confirmed that Kaimai Cheese Company and the Grate Kiwi Cheese Company are legitimate "independent processors" -- a status that effectively forces Fonterra farmers to supply them with cheap milk.

Now Fonterra not only has to deliver the milk where its smaller rivals want it, but those companies can each claim up to 50 million litres a year of the low-cost milkflows, even though they may be linked to the same manufacturer.

The commission today released a final determination that potentially opens up Fonterra to a proliferation of small food processors each seeking a share of the 600 million litres of "statutory" milk it has to provide at cost price.

"Kaimai and Grate Kiwi are 'independent processors' ... and are entitled to be supplied with milk by Fonterra," the commission said in a 46-page decision.

It said the Dairy Industry Restructuring (Raw Milk) Regulations 2001 allows independent processors to require milk to be delivered to a nominated delivery address -- which could be the same factory for a series of small companies.

"An interpretation of the term 'independent processor' in the regulations that allows an independent processor the freedom to contract a third party to perform some or all of the production process for milk, milksolids or dairy products best gives ... efficient operation of dairy markets," said Deborah Battell, the commission's director of competition.

Fonterra lost on all fronts in the case, in which the commission said: "Fonterra has breached the regulations by not supplying Kaimai and Grate Kiwi with milk under the regulations since October 1, 2008.

"The commission has ordered Fonterra to pay compensation to Kaimai and Grate Kiwi for the loss associated with the fact that they did not receive milk".

If the parties can't agree on the amount of compensation, the commission can order the amount to be paid.

The supply of raw milk to smaller rivals was a key trade-off that Fonterra farmers made to avoid commission scrutiny of the mega-merger that set up their company.

Kaimai and Grate Kiwi each sought 50 million litres of milk, but Fonterra argued they were not processors of raw milk, and were actually indirectly linked to Open Country Cheese.

Grate Kiwi began grating and blending cheese for the New Zealand market in 1991 and says it intends over time to expand into processing raw milk into cheese. Waharoa-based Kaimai only began operations this year to supply a range of soft, hard and semi-hard cheeses.

Former MP Wyatt Creech and the Dairy Investment Fund were co-founders of Open Country, and Mr Creech is a director of both Open Country and Kaimai.

Grate Kiwi - originally called Oceanic Foods - has a deal to pack retail cheeses for Fonterra's biggest domestic rival, Goodman Fielder, and has signed a deal with Open Country Dairy Ltd - which is controlled by meat company Affco Holdings Ltd.

Singapore-based global dairy trader Olam International owns a 25 percent stake in Open Country, which is now the nation's second-biggest dairy processor, and operates dairy factories at Waharoa in Waikato and Awarua in Southland. They process more than 450 million litres of milk into cheeses, powders and butter oil, with a third plant at Wanganui taking the company's milk processing capacity to over 800 million litres.

Goodman Fielder's fresh dairy business, based on the Tararua, Puhoi Valley Cheese and Meadow Fresh brands, does not have any farmer suppliers of its own and relies on receiving 250 million litres a year of Fonterra milk at cost price - an arrangement expected to lapse over the next five years.

- NZPA