Fonterra accused of monopoly move

Fonterra has been accused of anti-competitive behaviour, with critics claiming proposed changes allowing farmers to trade its shares between themselves will lock them into supplying the co-operative.

The Otago Daily Times has been provided with a discussion document by opponents of the proposed restructuring, which accuses Fonterra of gaining monopoly influence under the guise of capital restructuring.

The report's unnamed authors list a series of concerns about the proposal, the primary concern being that it would bring to an end shareholders having open entry and exit to the co-operative, because they could sell their shares only if there was a buyer.

Fonterra denies the accusation, its strategy and corporate finance manager Alex Duncan saying to restrict access would weaken the co-operative by discouraging people from joining in the first place.

It is understood opponents have already approached the Commerce Commission and the Ministry of Agriculture and Forestry, which yesterday confirmed in a statement that a legislative amendment to the Dairy Industry Restructuring Act would be required should shareholders approve the third and final stage of Fonterra's capital restructuring package.

The Act was passed by Parliament in 2001 and exempts Fonterra from the provisions of the Commerce Act.

Traditionally, shareholders bought and sold their shares from a co-operative at a set price, but under the proposal to be discussed next year, farmers could buy and sell Fonterra shares among themselves.

The document argues that in seasons when the milk price was low, those wanting to sell their shares might discover little or no market or a depressed share price, locking them into supplying Fonterra.

The existing share system pressured Fonterra to provide an efficient price to farmers, to compete with start-up dairy processors and by allowing shareholders to withdraw capital, it put pressure on management to perform.

The document states the share price could also be affected by economic conditions, such as the dairy farmers' $35 billion of debt.

"Farmers cannot afford to purchase extra shares and that financial ability to do so is likely to heavily suppress the share price."

New dairy processors also relied on farmers having free entry and exit from Fonterra, and the paper warned that if that was restricted, so would the establishment of new processors to compete with Fonterra.

Fonterra was accused of removing the Act's "checks and balances", such as in September, when a government amendment increased the price competing processors must pay Fonterra for milk.

Fonterra argued that under the previous formula, it was paying suppliers more for milk than it was receiving from processors it was required to supply.

Responding to the latest criticism, Mr Duncan said the Act required Fonterra to have equality of entry and exit.

"Nothing we have proposed in capital restructuring removes that obligation," he said.

Mr Duncan expected the Act to change once farmers' views on the third stage of recapitalisation were known, but the Government would ensure farmers would retain open entry and exit.

"[The Act] doesn't specify what price Fonterra shares must be, but it requires Fonterra to sell to farmers who want to enter the co-operative and to redeem from those wanting to exit, on equal terms," he said.

That issue, along with the redemption obligation, would require legislative change for the proposed share trading between farmers, he said.

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