KEY POINTS:
Fonterra claims it spent $14 million last season supplying subsidised milk to its competitors, and it wants the rules changed.
With news this week that all four newly established dairy processors have cornerstone or foreign ownership, Fonterra has started to question the benefits to New Zealand of supplying
up to 50 million litres of raw milk a year at a subsidised price to those companies.
The dairy giant's legal counsel David Matthews said under the Dairy Industry Restructuring Act Fonterra has to supply raw milk to existing and new processors, and to companies competing with Fonterra on the domestic market.
Matthews said new dairy processors were sourcing the bulk of their raw milk needs from contracted suppliers, but topping up with milk from Fonterra.
Under DIRA's requirements, Matthews said Goodman Fielder was supplied with up to 250 million litres a year for its dairy products sold on the domestic market, but competing processors were each given up to 50 million litres a year.
"What they are doing is going out to source their own milk. If they have a 200 million-litre plant, then they will source 150 million litres then dial up Fonterra to get 50 million litres."
Under the DIRA milk pricing formula, it cost Fonterra $7.53 per kg of milksolids for the milk last season for which it received $7.24 per kg from the processor.
"This discount or subsidy or whatever you call it, comes out of the pockets of farmers."
He believed one competing dairy processor paid their suppliers $7.75 per kg this season, but topped up its production needs with cheaper milk bought from Fonterra.
The dairy giant has been criticised for rising consumer dairy prices, but it has been selling milk to competing processors who have been turning it into products for export.
Matthews said the company had no problem with competition, but said the new export-focused dairy companies were providing little or no benefit to the domestic dairy market.
"They've got the subsidy so why not ram it back into the domestic market?"
Fonterra's concern has been accentuated by foreign investment in competing processors and the fact that benefits from the subsidised milk were being enjoyed by foreign owners.
New Zealand Dairies is now fully owned by Russia-based Nutritek, Dairy Trust is 25 per cent owned by Olam from Singapore, Synlait 14 per cent by Japanese corporation Mitsui and Mataura Valley, which plans to build a plant near Gore, also has overseas backing.
He appreciated foreign companies were securing access to a food source, but he felt they should be paying market rates rather than subsidised prices for the raw milk.
Matthews said the Ministry of Agriculture and Forestry estimates it would take another three years before competition reached a level required by the DIRA that allowed Fonterra to stop supplying raw milk to competitors.
Fonterra has been lobbying to increase the price it charges competitors and Matthews said it had received what he called a fair hearing from the ministry, with a decision on the future requirements due out in the next few weeks.
Fonterra operates in Chile, Australia and North America and he said it has to pay open market rates for milk in those countries.
- OTAGO DAILY TIMES