24 Aug 2008

Fonterra unhappy about delay to milk pricing regulations

9:38 pm on 24 August 2008

Fonterra dairy co-operative and its farmer suppliers are unhappy the Government has decided to delay changes to milk pricing regulations for another two years.

Regulations require Fonterra, as controller of 95% of the country's milk supply, to supply other processors with milk at a regulated price. They also stipulate the amount it is required to make available.

The Government ordered a review of those rules last year to resolve arguments over the price that Fonterra has been charging for milk and to meet increased demand from other processors.

It has already increased the amount of milk supplied under the regulations from 400 to 600-million litres a year.

The review supports Fonterra's complaint that it's having to supply milk to competitors at a lower price than it pays its own suppliers.

However, the Government has decided to keep the existing price setting formula in place for another year. It says this is to avoid a further blow out in prices consumers are paying for milk and dairy products.

It will draft legislation to introduce an auction system for raw milk for the following year, the 2010-11 dairy season.

Fonterra's chief executive, Andrew Ferrier says while the proposed move to an auction process is a step towards a fairer system, its farmers will have to continue subsidising its competitors to the tune of 30 cents a kg for another two years.

He says those competitors increasingly include large overseas investors moving into the New Zealand dairy industry.

And that rankles with Federated Farmers' dairy chairman, Lachlan McKenzie, who's also a Fonterra supplier.

He says the subsidy distorts the marketplace and New Zealand customers are effectively giving a hand out to overseas investment companies to the detriment of a fully owned New Zealand company.

He says while Fonterra will still be required to supply its competitors with milk under an auction system, at least it won't have to be at a price that disadvantages its farmer suppliers.

But Open Country Cheese, one of the independent processors that's been taking some of its supply from Fonterra, is pleased that the existing method of calculating the regulated or default milk price will continue for another season.

Open Country's chief executive, Alan Walters, challenges the view that the pricing formula is forcing the co-operative to supply subsidised milk to its competitors.

He says the default price says is linked to Fonterra's share value and if there's a gap between what it's paying its suppliers and what independent processors are paying for milk, then that's a reflection of its performance.