Open Country challenges validity of Fonterra's milk price

Open Country's submissions on the report were that the beta was too low. Photographer: Glenn Taylor

Open Country Dairy is seeking a judicial review of the way Fonterra Cooperative Group set its milk price in the 2018 season, despite the Commerce Commission giving the price-setting process a pass mark.

The commission noted the judicial review on its website, saying Open Country Dairy brought proceedings against certain conclusions in its 2018 report.

In that report, the regulator was satisfied that Fonterra's calculation was largely in line with the efficiency and contestability elements required by law governing the dairy sector. However, it was also of the view that Fonterra's asset beta - used in calculating the cost of capital for a milk processor - was too low, meaning the dairy giant ended up paying its farmers a higher price for their milk than warranted under the law.

Open Country's submissions on the report were that the beta was too low and that Fonterra's sales outside the Global Dairy Trade platform were too opaque.

The country's second-biggest milk processor also told the commission that independent processors were limited to investing in areas where they can earn a viable return, and that Fonterra's dominance meant that there wasn't a contestable market.

The regulator disagreed with that submission in the report, saying it didn't consider that Fonterra can use its market position to lower farmgate prices below competitive levels or restrict independent processors from accessing raw milk.

Those questions are among those up for review, with the Ministry for Primary Industries analysing 188 submissions on proposals to change the Dairy Industry Restructuring Act, which enabled the formation of Fonterra.

In its submission, Fonterra noted Open Country's and Synlait Milk's concerns over the way the base milk price is set. Fonterra said the status quo is working and is transparent.

Fonterra acknowledged Open Country's judicial review in its submission, saying the claims were on issues the smaller processor had already raised during the review.

"We consider that OCD's claims have little merit and are joining the proceedings to defend the decisions of the commission that are being challenged," Fonterra said in its submission. "OCD's ability to do this is another element of the checks and transparency in the regime."