Third time lucky?: Fonterra takes farmers to Supreme Court over soured milk contracts

Fonterra Cooperative Group told the Supreme Court it had only a "contractual arrangement" with former suppliers of the failed New Zealand Dairies in South Canterbury, meaning it didn't have to treat them the same as its shareholder suppliers.

Last November, the Court of Appeal rejected Fonterra's application to throw out a High Court ruling that it breached the Dairy Industry Restructuring Act by imposing less favourable terms on farmers who had previously supplied NZDL. Fonterra bought the independent processor's plant out of receivership in 2012 for $48.5 million and took on the farmers, who supplied milk from farms in North Otago and South Canterbury.

Fonterra made a deal with the farmers, agreeing to buy their milk under a "growth contract", rather than a fully share-backed supply, where farmers purchase one Fonterra share for every kilogram of milk solids they supply in a season and are paid the farmgate milk price plus a dividend on each share. Under the growth contract, the farmers were entitled to 5 cents less per kilogram of milk solids than the contract milk price and bought 1,000 Fonterra shares but couldn't "share up" - become fully share-backed - in their first year of supplying Fonterra.

According to DIRA, under the legislation enabling the merger of the Dairy Board with the New Zealand Dairy Group and Kiwi Cooperative Dairies, Fonterra isn't able to give new entrants different terms from its existing shareholding farmers. The High Court ruled the farmers qualified to become fully-fledged shareholders and Fonterra misled them about their ability to buy more shares, a finding which the Appeal Court upheld.

Fonterra's QC, Jack Hodder, said DIRA wasn't a "dairy farmer's bill of rights" but was there to regulate milk supply in a way that enhances contestability, and the South Canterbury farmers didn't count as new entrants.

"These people were not seeking to or part of the contestability processes, it wasn't an open-entry, open-exit exercise in any sense. It was a contractual arrangement," Hodder said. "Nothing in this Act abolishes the power to have a contract that isn't one of share-backed supply."

The hearing is set down for two days, with Hodder set to finish his submissions this afternoon.

The action comes as Fonterra faces continued scrutiny from analysts over its lack of transparency despite changes to its communications and spending an estimated $20 million on a major advertising campaign. Pressure is also mounting over the dairy giant’s Chinese strategy as major partner Beingmate’s share price continues to plummet, meaning Fonterra is down about $250 million on paper on its initial outlay of $755 million.

Fonterra declined to comment and Mr Goddard said it was too early to discuss the case.

Read the Court of Appeal decision here.