Watchdog targets Fonterra

Fonterra's current season forecast for New Zealand is $3.90 a kg of milksolids, compared with DairyNZ's estimate of a breakeven of $5.25. Photo / Mark Mitchell

Australian competition regulator investigates cuts in milk payouts.

Fonterra's top executive in Australia, Judith Swales, says she is confident the co-operative has done nothing wrong and that it is co-operating fully with the Australian Competition and Consumer Commission (ACCC) in its investigation of the sudden slump in milk prices across the Tasman.

Both Fonterra and Australia's biggest dairy company, Murray Goulburn, are being investigated by the ACCC - Australia's equivalent of the Commerce Commission - after they both cut their farmgate milk prices within days of each other.

The ACCC is examining the timing and notice of the cuts, which took place late last month and early this month.

Murray Goulburn - Fonterra's larger competitor in Australia - said on April 27 that its A$5.60 farmgate milk price was no longer achievable, revising it down to A$4.75 to A$5 a kg.

On May 5, Fonterra Australia revised its farmgate milk price from A$5.60 to A$5, which it said better reflected the reality of "the supply and demand imbalance that is affecting global dairy commodity prices".

Swales, Fonterra's managing director for Oceania, said Fonterra had a contract with Bonlac Supply Co to buy milk from farmers at a price not less than that offered by the market leader in Victoria - Murray Goulburn.

"We have been saying for quite some time that the milk price in Australia was unsustainable," she told the Weekend Herald. "The fact is that Australia is not immune to the global challenges."

For the past two seasons New Zealand farmers have not been covering their costs because of global overproduction and the withdrawal from the market of the two biggest customers - Russia and China.

Fonterra's current season forecast for New Zealand is $3.90 a kg of milksolids, compared with DairyNZ's estimate of a breakeven of $5.25.

Swales said Fonterra had lost money in Australia over the past two years because of the high milk price there.

The basis of the ACCC's investigation is whether the two companies gave wrong signals to farmers and misled them.

"We would say that we have not. We have been flagging that we were concerned about the milk price and were asking farmers to budget conservatively," she said. "We will fully co-operate with the ACC and we are fully confident that we have done nothing wrong."

The sudden drop in milk prices - to below the average breakeven point in Australia of A$5.40 a kg - has caused a furore in the farming community and on the political scene.

Australia goes to the polls on July 2, and Deputy Prime Minister Barnaby Joyce visited dairy farmers in Victoria this week and said he would consult the Opposition on a support package for farmers.

The ANZ said it would suspend loan repayments and waive fees as part of an assistance package for Australian dairy farmers hit by cuts to farmgate milk prices.

"We know many of our customers are doing it tough," ANZ general manager of regional business banking Christine Linden told AAP.

In the aftermath of the milk price downgrade and a major earnings downgrade, Murray Goulburn's units - which listed on the ASX last July - traded yesterday at A89c - down from A$2.14 just before the April 27 milk price and earnings announcement.

Managing director Gary Helou and CFO Brad Hingle resigned after the downgrade and there have been a string of resignations from the board. Investors have launched a class action against the company.