Fonterra's business in Chile is the focus of an investigation by the South American country's prosecutor.
The probe follows a complaint from a shareholder of Fonterra subsidiary Prolesur about commercial dealings between Prolesur and another Fonterra Chile subsidiary, Soprole.
Chilean charity foundation Isabel Aninat, a 13.6 per cent shareholder in Prolesur, has made a complaint against Fonterra's appointed directors on the Prolesur board.
Prolesur, based in southern Chile, is a Fonterra ingredients business. Soprole, a consumer product business operating in the north, says it sources about 30 per cent of its daily fresh milk from Prolesur.
Fonterra, New Zealand's biggest company, said the complaint is at an "informal investigation" stage by an appointed prosecutor.
"The complaint relates to a commercial disagreement between the Fonterra-appointed directors and minority [foundation] directors on the Prolesur board, concerning terms of sale for cheese between Prolesur and Soprole ..."
Media reports in Chile claim seven Soprole executives have refused to turn over their computers to the high-complexity crimes unit of the prosecutor's office.
The reports say the complaint is against five directors of Prolesur, one of whom is Chile's former minister of education Gerardo Varela.
"No charges have yet been brought against the Fonterra-appointed directors," said Fonterra in response to Herald inquiries.
Soprole employees were cooperating fully with the prosecutor as part of "this preliminary investigation", said Fonterra.
"We fully support our appointed directors. If any charges are brought by the Chilean prosecutor after investigating the claims, the directors will vigorously defend them."
Chilean media reports claim Fonterra could be considering selling its South American assets for $1 billion.
Fonterra, which posted a historic loss of $196 million last year and debt of $6.2b, is reviewing all its assets as it seeks to reduce debt by $800m this financial year. No asset sale decisions have yet been announced.
Chile's commercial prosecution unit has been approached for comment.
New Zealand farmers are part of the dairying landscape in Chile, either operating there or through equity investment in farms.
One Kiwi, who spoke on condition of anonymity, said: "They [Fonterra] really don't do themselves any favours. The populist politicos love it, it gives them plenty of fodder to rally against foreign corporates coming here and taking the mickey out of local laws."
Prolesur's general manager Juan Carlos Petersen exited the company late last year.
News of the prosecutor's investigation follows reports of increasing hostility among Chilean milk suppliers towards Fonterra in southern Chile.
Late last year Mike McBeath, the New Zealand chairman of Chile's second biggest dairying operator, the part-Kiwi owned Chilterra company, told the Herald Fonterra's continuing underpayment for milk had left dairy farmers little choice but to build their own processing cooperative.
Chilterra's nine farms supply Prolesur.
McBeath alleged Fonterra was "taking advantage and making massive profits" in Chile.
He said Fonterra set its milk price at export price level, which was lower than milk fetched on the domestic market. But it sold to the domestic market.
"They transfer everything out to Soprole, which shows a big profit."
Fonterra responded at the time that Chile was a net importer of dairy products.
"In addition to domestic factors, global import/export prices can influence local prices," it said.
Soprole is Fonterra's oldest offshore investment.
Fonterra and its legacy entities have controlled the company for 20 years, but New Zealand's connection with the consumer goods producer goes back to 1986, when the then-New Zealand Dairy Board acquired more than 50 per cent of Soprole's shares. (The single-desk exporter Dairy Board was rolled into the 2001 industry merger that created Fonterra.)
Today Fonterra owns 99 per cent of Soprole, which was founded in 1948 initially as a milk, cheese and butter producer. One of Soprole's founders was Juan Luis Undurraga Aninat, who in 1986 established the charity foundation which has sparked the current investigation with a complaint against Fonterra's directors on the board of Prolesur.
Prolesur is an ingredients operation, established in 1990 when Soprole was restructured. Fonterra controls Prolesur through Soprole, which owns 70.4 per cent of the southern Chile company. Dairy Enterprises S.A owns 15.7 per cent and the Isabel Aninat charity 13.6 per cent. The balance is owned by 600 minor shareholders.
The Chilean dairy market is controlled by four companies Soprole, Nestle, Loncoleche and Colun, a fast-growing farmer cooperative.
Fonterra's 2018 financial report said its Latin American business, which also includes Brazil, increased EBIT by 29 per cent from $91m in 2017 to $117m, driven by "the solid performance" of Soprole in the mature cheese and yogurt categories. Brazil turned around its performance and went from a loss position to breakeven in a challenging economic environment, said the report.
Milk volumes handled by Soprole were 7 per cent up at 31 million standard litres last year.
According to Fonterra's website, Soprole is the best-known corporate brand in Chile outside of Coca-Cola. The company supplies 33,000 Chilean ingredients and food service customers.