The Commerce Commission has released its final determination regarding disputes between Fonterra Co-operative Group Limited and both Kaimai Cheese Company Limited and The Grate Kiwi Cheese Company Limited.

The Commission's view is that Kaimai and Grate Kiwi are 'independent processors' under the Dairy Industry Restructuring (Raw Milk) Regulations 2001 and are entitled to be supplied with milk by Fonterra under the Regulations. The Commission also considers that the requirement in the Regulations that Fonterra supply milk to independent processors allows independent processors to require milk to be delivered to a nominated delivery address.

Fonterra must therefore supply milk to Kaimai and Grate Kiwi on request in accordance with the Regulations, and must deliver that milk to the delivery addresses that Kaimai and Grate Kiwi nominate.

The Commission has determined that Fonterra has breached the Regulations by not supplying Kaimai and Grate Kiwi with milk under the Regulations since 1 October 2008. The Commission has ordered Fonterra to pay compensation to Kaimai and Grate Kiwi for the loss associated with the fact that they did not receive milk under the Regulations from 1 October 2008. The Commission has ordered Fonterra, Kaimai and Grate Kiwi to use their best endeavours to agree on appropriate amounts of compensation. If the parties are unable to agree, then any one of the parties may apply to the Commission, within three months, for a decision on the appropriate level of compensation.

"The Commission considers that an interpretation of the term 'independent processor' in the regulations that allows an independent processor the freedom to contract a third party to perform some or all of the production process for milk, milk solids or dairy products best gives effect to the purpose of the promotion of the efficient operation of dairy markets in New Zealand," said Deborah Battell, Commerce Commission, Director of Competition. "This interpretation also best gives effect to the principle that independent processors must be able to obtain raw milk, and other dairy goods and services, in order for them to compete in dairy markets."

Both Kaimai and Grate Kiwi were in dispute with Fonterra about the application of the Regulations which require Fonterra to supply raw milk to 'independent processors' (subject to certain other regulations). Kaimai and Grate Kiwi both applied to Fonterra to purchase milk under the Regulations on the basis that they consider they are independent processors. Fonterra did not supply them with milk under the Regulations because it considered that neither are independent processors. The disputes concern the definition of 'independent processor' as outlined in the Dairy Industry Restructuring Act 2001, and whether an independent processor can contract a third party to do the initial processing of the milk.

The Commission released its draft determination of the disputes on 16 October 2008 and a further consultation document on 19 March 2009.

The Commission's Final Determination can be viewed on the Commission's website www.comcom.govt.nz under Public Registers/Dairy

Background

The Dairy Industry Restructuring Act 2001 (DIR Act) provided for the regulatory and structural reform of the dairy industry. The Commerce Commission has both an enforcement and adjudication role under subpart 5 of Part 2 of the DIR Act. The purpose of subpart 5 of Part 2 is to promote the efficient operation of dairy markets in New Zealand. In relation to the dairy industry, the Commission:

• provides determinations on disputes with Fonterra about the application of subpart 5 of Part 2 of the DIR Act or any regulations made under section 115 of the DIR Act; and

• undertakes investigations in relation to subpart 5 of Part 2 of the DIR Act.

The DIR Act promotes a number of principles, as set out in section 71. One of the principles is that "independent processors must be able to obtain raw milk, and other dairy goods and services, necessary for them to compete in dairy markets."

The Dairy Industry Restructuring (Raw Milk) Regulations 2001 (Raw Milk Regulations), made under section 115 of the DIR Act, require Fonterra to supply raw milk to independent processors, up to a maximum of 50 million litres per season (for most independent processors).

The definition of 'independent processor' is defined in section 5(1) of the DIR Act and is adopted in the Raw Milk Regulations. The relevant part of the definition states that an independent processor is "a processor of milk or milksolids or dairy products." The Raw Milk Regulations provide that Fonterra and an independent processor may agree a price for the supply of raw milk, but if there is no such agreement, an independent processor may require Fonterra to supply the regulated milk at the default milk price (regulation 8(1)and (2)).

The dairy industry is also subject to the provisions of the Commerce Act and the Fair Trading Act.

Grate Kiwi began grating and blending cheese for the New Zealand market in 1991. It currently specialises in providing grated cheese predominantly for the food service market and states that it intends over time to expand into processing raw milk into cheese.

Waharoa-based Kaimai commenced operations on 7 January 2008 and supplies a range of soft, hard and semi-hard cheeses.

As the underlying issues in dispute in the applications from both Kaimai and Grate Kiwi are related, the Commission considered it appropriate to consider the applications together.