Fonterra canvasses other uses for 'virtual' processing

Fonterra could technically circumvent controversial raw milk regulations which require it to supply rivals with millions of litres of milk at a low price, a Court of Appeal decision suggests.

Fonterra's 10,000 farmers have frequently complained over the past decade that requirements for it to level the playing field by supplying smaller processors each with up to 50 million litres of milk costs them more than $1000 apiece season.

But the Court of Appeal -- which yesterday ruled these smaller processors did not have to physically process the milk themselves -- said that Fonterra's claim in the case that it could itself carry out such processing for a fee might mean it could get around the raw milk regulations.

By changing supply contracts so that Fonterra's processed products customers could order raw milk and become "virtual processors" Fonterra could make the level playing field obligations useless, the court said in its 22 page judgement.

Fonterra had complained to the court that two small companies, Kaimai and Grate Kiwi, were not processors of raw milk, but instead passed on their milk to a big rival processor, Open Country Cheese, for it to process.

But the Appeal Court judges ruled the Grate Kiwi Cheese Co and the Kaimai Cheese Co were "independent processors", just as though they were turning the milk into cheese on their own premises.

Fonterra told the court that the Dairy Industry Restructuring Act's regulations only made sense if "independent processors" meant companies which actually processed raw milk.

It suggested there was nothing to stop it organising for a number of its customers to order large quantities of raw milk, which Fonterra would then process at its own facilities.

Fonterra argued there would be nothing to stop it preventing the handing over of most of the 600 million litres of "statutory" milk it currently supplies to rivals.

As long as they were not interconnected, a multitude of virtual processors could ask for their share of the 600 million litres and individual deliveries would be reduced proportionately, though the judges noted that the Commerce Commission, which joined the case, had not addressed "the circularity of such an arrangement".

The judges also said the suggested arrangement would make a nonsense of the Act's sunset provisions, which allow Fonterra to be absolved from providing cheap milk to rival processors when its market share drops below 80 percent in the North Island, and in the South Island (excluding the West Coast).