Fonterra said it was meeting with members of the board of its milk supply body - the Bonlac Supply Company - in Melbourne after the co-op's main competitor in Australia, Murray Goulburn, decided to dissolve a controversial scheme that was aimed at clawing back milk payments from Aussie farmers.

Murray Goulburn - Australia's biggest dairy company - also said it would shut down factories at Edith Creek, Rochester and Kiewa and dissolve the Milk Supply Support Package (MSSP) while writing it down by A$148 million ($160m).

The company also announced total writedowns of A$410m, the suspension of its dividend, and said it would review its dividend payout ratio.

All future repayments of MSSP - which were to recommence from this July - would cease, it said. The company would also make a payment to continuing and retired suppliers who had made MSSP contributions between July and September last year.


Fonterra, under its supply agreement with Bonlac, has to match or better Murray Goulburn's milk price.

The New Zealand co-op had complained that Murray Goulburn was paying unrealistically milk prices at a time when world prices were depressed.

The bubble burst in April last year when Murray Goulburn slashed its A$5.60 per kilogram of milksolids farmgate milk price, which meant Fonterra could follow suit.

"We anticipated several elements of MG's announcement, and we're working through what this means for our farmers and our Australian business," Fonterra said.

"We are meeting with some members of the Bonlac board, as they're an important stakeholder in this, and we will provide an update as soon as we can."

Australian media speculated that this week's MG announcement effectively adjusts the average milk price the company paid its farmers for the 2015-16 financial year upwards to A$5.53 a kg.

The move means Fonterra may now have to pay an extra A3.5c a litre for the 1.7 billion litres of milk its farmers supplied during 2015-16, according to a report in the Australian. The paper estimated it could cost Fonterra about A$60m.

In its statement to the ASX this week, Murray Goulburn's chief executive Ari Mervis said the decisions had been difficult to make "however they are necessary steps on the journey to ensure the future strength and competitiveness of Murray Goulburn".


"A strong MG is of fundamental importance to the Australian dairy industry and these decisions are necessary to lay the foundation for the future," Mervis said.

Murray Goulburn, which has been losing market share hand over fist to Fonterra and to other manufacturers, recorded a first-half loss of A$31.8m in February after reporting a A$10m profit a year earlier.

Fonterra has for years lost money in Australia and the last two have been particularly difficult as the co-op was forced to match its larger Aussie competitor, Murray Goulburn's, high milk price. The New Zealand co-op has only recently returned to profitability across the Tasman.

Australia is a highly significant market for Fonterra and it is the co-op's second biggest milk pool after New Zealand, and represents close to 20 per cent of Australia's total milk supply.

As it stands, prices for Aussie farmers are barely at break even, but analysts expect dairy farms to return to profitability in 2017/18.

Last month, the Australian Competition and Consumer Commission filed Federal Court proceedings against Murray Goulburn Cooperative over last year's milk pricing, but decided not to take any further action against Fonterra Australia.


ACCC chairman Rod Sims said Fonterra had been more transparent about the risks and potential for a reduction in the farmgate milk price from quite early in the season.