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BusinessDesk: Supreme Court rejects Fonterra’s appeal over supply of raw milk to rivals

BusinessDesk: Supreme Court rejects Fonterra’s appeal over supply of raw milk to rivals

By Paul McBeth

The Supreme Court has turned down Fonterra Cooperative Group’s appeal against a ruling it must supply raw milk to rivals even if they don’t process it themselves.

The top court’s bench was unanimous in upholding the lower court decisions, saying “to require a new entrant to possess or borrow the capital necessary to establish its own facility would establish a significant barrier to entry into the market,” according to the judgment delivered by Judge Andrew Tipping. The court awarded $15,000 in costs plus disbursements to respondents Grate Kiwi Cheese and Kaimai Cheese.

Fonterra argued its rivals shouldn’t be able to outsource processing while claiming rights to the regulated milk supply, saying it would limit milk available to companies that do process their own product.

“Although the meaning advanced by Fonterra is a possible one, there is nothing in the text of the definition or in the act or regulations to suggest that a processor must make use of its own facilities when undertaking the processing,” the judgment said.

That meant Grate Cheese and Kaimai qualified as independent processors and were entitled to access the regulated supply.

“All that is necessary to become an independent processor, as defined, is for the party concerned to be intending to process the regulated raw milk it obtains from Fonterra either personally or by means of contractual arrangements entered into for that purpose,” the judgment said.

The dispute stemmed from Grate Cheese and Kaimai outsourcing a large chunk of their processing to Open Country Dairy, the nation’s second-biggest dairy processor, which had spare capacity to pick up the work.

“To prevent the use of that spare capacity by adopting an unnaturally restrictive interpretation would not be conducive to efficiency in the relevant dairy market,” the judgment said.

The judges weren’t swayed by Fonterra’s argument that allowing its rivals to outsource processing would lead to an explosion of ‘virtual processors’ tapping the raw milk supply and immediately on-selling it.

“Even if toll processing might arguably in the short run reduce demand for milk at the farm gate, we are not satisfied that this is a factor of sufficient weight, when viewed in a wider context, to overcome both the ordinary and natural meaning of the definition and the general purpose of the act and the regulations,” the judgment said.

The decision isn’t likely to have an immediate impact on Grate Cheese and Kaimai, with the latter now owning its own processing facility and the former purchasing hard cheese which it then processes and repackages.

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GOOD , I am sick of Fonterra's Monopoly pricing model in the domestic milk market . I know this wont affect what we pay for milk but at least they have got a bloody nose .
New Zealand should never have let Fonterra get to the level of market dominance it has , its now simply the "tail that wags the dog " those crooked bastards do as they please and ordinary Kiwi's suffer .  
I still want to know how Australian milk is cheaper in Sydney than Auckland ( within the same supermakert chain ), when Australia imports tons of our dairy products.
Fonterra have never answered the question.  

Boatman, you are a fisherman, you should know about burley, over there milk sold by the supermarkets as a bait to bring the punters in.
Burley is essential for attracting fish when you are fishing. A constant stream of burley ensures a constant stream of fish.
Nothing super about the supermarkets.

First of all boatman.  You lack a bit of understanding about Fonterra.  What Fonterra sells milk for on the domestic market eg. to Goodmanfielder (Meadowfresh, Cow & Gate or Countdowns Housebrand Milk) is the price it has to pay its farmers for milk; thats what the REGULATED milk-price is.  If the regulated or DIRA milk price was higher than what it was actually earning for the milk globally then Fonterra would be paying its farmers too much and would be bankrupt as soon as the bank funding dried up.  Given your previous posts I assumed you are against hand-outs; maybe you just mean your against hand-outs to the poor and are happy for some yourself as thats what your asking for if you want Fonterra to provide milk cheaper than what it could earn exporting it.
Maybe, just maybe the reason milk is "cheaper" in Australia is due to other factors rather than a regulated monopoly.  Lets have a quick look; in Australia housebrand milk is roughly $1 per L vs NZ at $1.75 per L so there is a difference of 75c (excluding exchange rates).  Australian farmers of their larget co-operative Murray Goulburn get less money - last year they got $5.65/kg milksolids (milksolids actually only means protein and fat as thats what farmers get paid for) which equates to roughly to 37c/L  for standardised milk(3.3% fat & 3.3% protein) vs Fonterra farmers who got $7.60 or 50c/L - 13c of the difference - which is mostly due to the exchange rate.  Australia has no GST on milk we have 15% so $1.75/1.15*0.15 so theres another 23c of the 75c difference so we now have 46c only 29c to go.  Milk only got to $1/L recently and it was driven by competitive pressures not amongst the dairy suppliers not because government forced some hand-outs but by competition amongst the retailers - the price used to be $1.49!!!!.   If the retailers could cut their margins as much as they did  they probably had a bit of room to move in the first place.  Lets look - Woolworths (they own Countdown) makes on average a 25% margin on every sale they make in Australia (23% in NZ) if they cut their price by 33% from 1.49 to $1 they probably actually made better than average margins on milk.  Closer to home supermarket margins would only have to be making 19% and to be subsequently cut to zero (as I am suggesting happened in Australia) to explain the the rest of the 29c.  13c goes to the farmers, 23c goes to goverment and 29c goes to the retailers 75c.  
All the information is publicly available but unfortunately our media feeds a naive public a whole lot of sensationalist rubbish - I have lost all respect for you John Campbell. So to get to the same price as in Australia pay our farmers less, get rid of GST on Milk and get competition in the supermarkets.  Too easy.

Asher , Thanks for the informative response about milk pricing , its helpful in gaining an understanding as to who is rorting the public, and the supermarkets are not angels in this value chain.
I intensely dislike monopolies, oligopolies  or near - monopolies becuase they can abuse their position of power . Fierce free market competition has always been good for the consumer.  
With reagrds to my views on handouts , I believe there must be a social safety net for those who really and genuinely cannot support themselves, but given the disproportionate number of Kiwi's receiving handouts, I think is wrong.
One is left with the impression we are incapable of working , its become too easy to do notihng and get paid for it  , and it is being abused.
And I really object to people with drug convictions having their habit being supported with the taxes I pay.
And finally , I dont want free milk , I just want to pay what I belive to be a fair price for what we grew up with as an essential food source.  I grew up being able to walk to the fridge and have a gulp of milk from the glass pint bottle during the afternoons after school . Now we have restricted the amount of milk our  kids drink because it is so expensive.
Something has gone wrong when milk is so expensive than we are compelled to restrict  our kids from drinking it.
But , I guess we are still a lucky country  

Are you sure fierce free market competition is good for the consumer boatman? From the little I know, most of the developed world, that which kotows to USA directive, has espoused free markets underpinned by neoclassical economic rational. What is this reaping us? If Fonterra is anything to go by conglomeration of corporations; and I'm a shareholding supplier!
Also given the level of foreign interest in our farmland, do you think free market principles are going to ensure an affordable milk price for NZ consumers. Do you think this is what is motivating the National government and coalition partners plus ex ministers in competing invester owned processors?
Afraid not, as a dairy farmer I'd say we are mortgaged to foreign investment (ie banks) which is protected by a morally corrupt government. You'll not get cheap milk anytime soon, and probably recieve a compromised environment to boot, how else are we to service our bank interest and/or foreign capital investment? Free market economics for you.