The Commerce Commission considers that Fonterra Co-operative Group Limited (Fonterra) has not breached the Commerce Act by engaging in what it calls 'tactical pricing'.

The Commission investigated after receiving a complaint that Fonterra had allegedly breached section 36 of the Commerce Act, which prohibits a person or business with a substantial degree of power in a market from taking advantage of that power to prevent competition.

The complaint concerned Fonterra's introduction of a tactical pricing regime, which Fonterra claimed was designed to arrest the loss of valuable milk supply to competitors. Under the scheme, Fonterra offered certain dairy farmer suppliers contracts for milk supply at prices which were higher than the raw milk component of the full payout. It was alleged that Fonterra was only able to increase the price for raw milk it pays to targeted suppliers because it had a substantial degree of market power.

Fonterra argued that the higher milk prices to the targeted suppliers were offered in order to match those being offered by its competitors. These suppliers either had switched, or were considered to be at risk of switching, to supply a rival dairy processor. They were important to both Fonterra and its competitors because of their size, proximity to processing plants and milk quality. Tactical prices were only available to non-shareholders in Fonterra.

"In the Commission's view, Fonterra's tactical pricing scheme is unlikely to breach the Commerce Act," said Deborah Battell, Commerce Commission Director of Competition. "While it is acknowledged that Fonterra is likely to have a substantial degree of market power in the raw milk market, the prices Fonterra offered to the targeted suppliers were no higher than those of its competitors and were, in some cases, lower. The Commission therefore considers that tactical pricing is a legitimate response to vigorous competition from new entrants who are seeking to expand the number of their milk suppliers."

"In this instance, the Commission considers that Fonterra's behaviour is consistent with what can be expected in competitive markets," said Ms Battell. "The Commission will now close its investigation."

Background

Section 36 of the Commerce Act 1986 prohibits persons who have a substantial degree of market power in a market from taking advantage of that position for various purposes, including preventing or deterring competitive conduct by others.

Only the courts can give an authoritative ruling as to whether behaviour breaches the Act and award appropriate penalties. If other parties have a different view from the Commission, they can initiate their own action under the Commerce Act.