The payment of higher prices to farmers being courted by rivals by Fonterra has got a thumbs up from the New Zealand competition regulator.
Tactical pricing by Fonterra was a legitimate response to vigorous competition from new entrants seeking to expand the number of their milk suppliers, theCommerce Commission said.
Fonterra had not breached the Commerce Act by engaging in so-called tactical pricing, it said. Fonterra offered certain dairy farmer suppliers contracts for milk supply at prices which were higher than the raw milk component of the full payout.
The farmers had either switched, or were considered to be at risk of switching to rivals. The so-called tactical prices were only available to non-shareholders in Fonterra.
Fonterra argued that the farmers were important because of their size, proximity to processing plants and milk quality.
Competitors alleged Fonterra was only able to increase the price for raw milk it paid to targeted suppliers because it had a substantial degree of market power.
Section 36 of the Commerce Act prohibited a person or business with a substantial degree of power in a market from taking advantage of that power to prevent competition.
"In the Commission's view, Fonterra's tactical pricing scheme is unlikely to breach the Commerce Act," said Deborah Battell, director of competition.
Fonterra was likely to have a substantial degree of market power in the raw milk market, but the prices it paid were no higher than those of its competitors and were, in some cases, lower.
"In this instance, the commission considers that Fonterra's behaviour is consistent with what can be expected in competitive markets," said Ms Battell.
The case was now closed, though parties who disagreed with the decision could initiate their own court action under the Commerce Act.
