Supreme Court rejects Fonterra rival milk supply appeal

CEO Theo Spierings said dairy commodity prices were likely to remain under some pressure through to the middle of the year. Photo / Greg Bowker

The Supreme Court has turned down Fonterra'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.