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Conference on Open Country Cheese Dairy Draft

28 June 2005

Commerce Commission to hold conference on Open Country Cheese Dairy Draft Determination

The Commerce Commission today confirmed that it will hold a conference to hear submissions on the Commission's draft determination relating to Open Country Cheese Company Limited's dispute with Fonterra Co-operative Group Limited.

The Commission published its draft determination on 29 April 2005 on Waharoa-based Open Country's dispute with Fonterra over the cost of the transport component of the default price for raw milk that Open Country purchases from Fonterra. This determination was made under the Dairy Industry Restructuring Act 2001.

Fonterra is currently required to supply Open Country with raw milk at the default milk price. Regulation 8(5) of the Dairy Industry Restructuring (Raw Milk) Regulations 2001 provides that the default milk price is the wholesale milk price for the season plus the 'reasonable cost of transporting the raw milk to the independent processor'.

The conference provides an opportunity for interested parties to present their submissions orally and for the Commission to ask questions based on those submissions. The conference will follow the Commission's usual conference procedures.

The conference will commence on 16 August 2005, and continue on 18 August if required. It will be held in the Commission's ground floor conference room located in the NGC Building, 44-52 The Terrace, Wellington.

The Commission received a number of submissions from interested parties. All submissions and the draft determination issued by the Commission can be found by accessing the Commission's website www.comcom.govt.nz

Background

Fonterra currently charges Open Country 22.1 cents per kilogram of milk solids (kgMS) for transport, which is based on its average national transport cost. In its draft determination, the Commission set out its preliminary view as to a method of calculating the transport cost to Open Country, which would reduce the amount paid by Open Country by approximately seven cents to 14.76 cents per kgMS.

Fonterra argues that the reasonable transport costs should reflect the fact that it optimises its national milk collection network and therefore, a charge based on the national average is appropriate. Open Country alleges that the national average-based cost that Fonterra proposes to charge Open Country does not account for Open Country's particular circumstances. In its preliminary view, the Commission considers that the reasonable transport costs should be based on Fonterra's actual costs.

However, these need to be adjusted to exclude some costs included by Fonterra that the Commission considers are not transport costs. A further adjustment is required because Fonterra's transport costs are relatively high.

Fonterra operates large, efficient, centralised processing plants, which can necessitate transporting milk over long distances. In contrast, raw milk is supplied to Open Country over relatively short distances. Overall, the Commission considers the reasonable transport cost should reflect the particular characteristics of the supply to Open Country.

The Commission's preliminary view is that it is appropriate to use costs that a hypothetical Fonterra stand-alone, Waikato region, raw milk transport division would bear, and scale them to reflect the portion that Open Country should bear. The Commission's approach is based on a formula that reflects its preliminary view that the primary drivers of Fonterra's delivery costs to Open Country are region, volume of milk delivered, and delivery distance travelled.

ENDS

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