Fonterra has won a battle and lost a war in the Court of Appeal, with judges ruling that two small dairy processors with links to a big domestic rival are "independent processors" who can each take an allocation of "cheap" milk even if it is actually processed by the rival.
Fonterra unsuccessfully argued such companies were only "virtual processors" and not entitled to the milk.
But Fonterra did succeed with an appeal against a High Court decision upholding a Commerce Commission ruling that the big cooperative breached industry regulations by refusing to supply milk to the companies unconditionally.
The Appeal Court judges said today the Grate Kiwi Cheese Co Ltd and the Kaimai Cheese Co Ltd were "independent" and that the milk could be taken by those companies for toll processing.
Industry observers have said this means "virtual" dairy companies can ask for 50 million litres a year from Fonterra farmers, and ask the cooperative to deliver it to a bigger company's factory for processing.
To ensure competition after Fonterra was formed, enabling legislation required it to supply "regulated" and relatively cheap milk to smaller processing companies, and Grate Kiwi and Kaimai argued in 2008 that any person who carried out some processing of any kind of milk or dairy product should be able to have up to 50 million litres of cheap milk delivered to the factory of their choice.
But Fonterra argued that Kaimai and Grate Kiwi were not processors of raw milk: the two companies were passing on their milk to Open Country Cheese to be made into cheese which they then processed and packaged. Open Country was one of the first small companies with which it faced-off in front of the commission, but is now the nation's second-biggest dairy processor.
If Kaimai and Grate Kiwi were supplied with raw milk at cost price it could mean any company which processed dairy foods of any kind could get cheap milk from its farmers, Fonterra said.
Grate Kiwi began grating and blending cheese for the New Zealand market in 1991, when it was called Oceanic Foods.
Waharoa-based Kaimai is a newer company producing a range of soft, hard and semi-hard cheeses.
Former MP Wyatt Creech and the Dairy Investment Fund were co-founders of Open Country, and Mr Creech was a director of both Open Country and Kaimai. Dairy Investments Fund owns 30 percent of Grate, 40 percent of Kaimai, and 10 percent of Open Country Dairy Ltd, but the companies are not "interconnected".
Fonterra announced in 2009 it was appealing against the Commerce Commission's ruling because the raw milk regulations were costing each of its 10,000 farmers about $1000 a year, and the ruling widened the range of companies eligible to receive the statutory milk.
The Appeal Court emphasised that a court "would not look kindly" on Fonterra manufacturing disputes to discourage small players from accessing raw milk, but the two small companies presented no evidence that Fonterra began the dispute in bad faith.
"There was a genuine issue to the meaning of the regulations," the judges said.
Fonterra controls nearly 95 percent of the nation's milk production, which is about 16 billion litres, and it provides 600 million litres to rivals.