Tactical milk pricing subject of complaint

The Commerce Commission is considering investigations into Fonterra for tactical milk pricing and the retail price of dairy products.

Dairy Trust and Open Country Cheese, in which it has a cornerstone shareholding, have lodged a complaint about tactical pricing, where Fonterra last season paid contracted suppliers more for milk in areas where it faced competition.

The second complaint related to dairy retail pricing following a complaint by Wyatt Creech, the chairman of Kaimai Cheese and a director of Open Country Cheese, which related to the massive jump in the price of milk and cheese in which a 1kg block of mild cheddar increased 66% since April last year.

A Commerce Commission spokesman said it was making preliminary inquiries to determine whether the two complaints should be investigated.

Dairy Trust chief executive Mark Fankhauser declined to comment.

Fonterra's tactical pricing policy applied to contracted milk supplied last season in South Canterbury and Waikato where it faced competition from New Zealand Dairies and Open Country Cheese.

The policy was to have been subjected to a review, and given the growth of competition this season from Synlait in Canterbury and Dairy Trust in Southland, as well as the need to secure supply for expansion of Fonterra's Edendale plant, observers believe tactical pricing could be extended this season.

It is understood Fonterra paid between 12c and 28c a kg of milksolids more to contracted suppliers, than to fully paid-up shareholders.

Fonterra's milk supply strategy manager, Jason Minkhorst, said in an interview the company could not allow "profitable milk supply to be cherry-picked by the competition."

"No company can allow a competitor to do this. Shareholders expect us to protect their interests."

Tactical pricing allowed Fonterra to spread $20 million in fixed costs over suppliers which Mr Minkhorst said was worth 1.5c a kg to Fonterra's payout.

"If we couldn't recover those fixed costs, Fonterra suppliers' payout would be lower by 1.5c a kg."

He described it as a legitimate response to competition and added that he had not heard if the commission was formally investigating the complaints.

The commission has said it was investigating whether the Dairy Industry Restructuring Act, The Commerce Act and Fair Trading Act had been breached.

At the time of announcing its intention to launch tactical pricing, Fonterra chairman Henry van der Heyden said the move to offer higher spot pricing on contract milk would counter competitors and had been discussed with Fonterra suppliers at farmer meetings.

It only applied to contracted milk for last season and he viewed it as allowing flexibility.

"It was in the co-operative's interests to ensure we could compete aggressively for supply in areas where we face competition," he said.

Mr van der Heyden said at the time tactical pricing would only be implemented "if and when" it benefited the co-operative as a whole.