Cut-price milk producer triggers inquiry into Fonterra

By PHILIPPA STEVENSON

The Commerce Commission is to carry out its first investigation under the dispute provisions of the legislation setting up dairy giant Fonterra.

The maker of the cut-price Premium Milk, Auckland's Independent Dairy Producers (IDP), last month sought a ruling on the price it was paying Fonterra for raw milk.

The commission said yesterday that it would make a decision as soon as possible.

The ruling will be under the Dairy Industry Restructuring Act, which last year allowed Fonterra to be set up controlling 95 per cent of the country's milk supply.

A complicated formula regulates the price independent companies pay Fonterra for milk. Privately owned IDP has processed and supplied its branded milk in Auckland and the Waikato for four years.

Its chairman, Don Cowie, told the Business Herald that the company, founded by Clevedon dairy farmers Warwick and Alison Hoyte, had been behind in payments to Fonterra forerunner Kiwi by about $250,000.

He became involved with IDP in March when it hired Turnaround Managers, of which he is a director, to address the company's solvency and management deficiencies.

Cowie said the dispute revolved around the price paid for milk from November 2001 to August 1 this year.

The company was paying a high spot price, rather than the regulation-set default price, which is the average payout to farmers plus an adjustment for what farmers receive in their Fonterra shares.

IDP's management asked to pay the default price, but Fonterra's milk management subsidiary, NZMP, said IDP was ineligible for the lower price because of the arrears, Cowie said.

"Our response is that almost all of the milk was purchased over that period by bank cheque, [and] paid for in advance. So Fonterra didn't incur any risk in providing that milk.

"Because of the 55c a litre the company was required to pay, it continued to trade at a loss. It pointed out that if it was able to enjoy the same price as competitors - in the order of 35c to 40c a litre - it would have been trading profitability and that would have assisted its repayments."

IDP continued to pay 55c a litre until May 31, when the arrears were paid off. It requested a price reduction then, which was rejected although NZMP conceded 5c a litre so the company was still paying significantly more than others, he said.

IDP had been paying the lower, default price since August 1.

NZMP general manager (NZ) Alison Andrew said the company believed it had complied fully with the raw milk regulations and behaved very fairly towards IDP.

"IDP had significant amounts of money owing. Rather than close them down, Fonterra continued to supply milk on agreed terms that were within the market range. IDP paid the agreed price and traded out of its difficulties. It now seeks to revisit that agreement."

The commission has also been investigating allegations of anti-competitive behaviour against the two main milk suppliers, Fonterra's Mainland, and New Zealand Dairy Foods, since April.

Another small milk company, Tussock Milk, complained that the big companies were cutting prices to retailers.