Breaking into the lucrative value-added dairy market does not require ownership of a processing plant. New entrants can demand Fonterra provide raw milk to be processed by a third party processor in a “tolling operation”.
Fonterra dominates the raw milk market in New Zealand. To encourage competition after Fonterra was established, dairy industry regulations specified that raw milk was to be provided to competitors at a default price fixed by regulation. Currently, Goodman Fielder is entitled to 250 million litres per season. Any other applicants can get up to 50 million litres each with this supply capped at a total of 600 million litres.
Fonterra argued that this concession applied only to applicants with their own processing plant. The suggestion was that Fonterra considered the default price for selling raw milk was too low, leaving it at a commercial disadvantage to competitors producing dairy products. Limiting the field of applicants to only those with processing facilities would have the effect of lessening competition.
The Supreme Court ruled that dairy industry regulations should not be read narrowly.
It was open to any business to apply for an allocation of up to 50 million litres and this applicant was free to use any spare capacity offered by third parties to process the raw milk into dairy products. Third party processors would be charging a “tolling fee” for processing raw milk through their plant.
Requiring new entrants to establish their own processing plant would create a significant barrier to entry, the court said.
The court emphasised that this ruling did not force Fonterra to supply raw milk to applicants who would simply on sell the raw milk unprocessed.
Fonterra v. Grate Kiwi Cheese – Supreme Court (15.03.12)
12.006