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Fonterra not in breach - Commerce Commission

22 November 2005/064

Commerce Commission considers Fonterra not in breach in including capital profits

The Commerce Commission has reached a preliminary view that Fonterra has not breached the Dairy Industry Restructuring (Raw Milk) Regulations 2001 by including capital profits in retention when calculating the wholesale milk price.

In October, Waharoa-based Open Country Cheese Company Ltd applied to the Commission to determine whether capital profits from Fonterra's sale of its shares in Wrightsons Limited and National Foods Limited should be included in the calculation of the wholesale milk price as defined in the Dairy Industry Restructuring (Raw Milk) Regulations 2001 (the Regulations).

Under the Regulations, Fonterra is currently required to supply Open Country with raw milk at the default milk price. Regulation 8(5) 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'. Fonterra's retention is one component of the wholesale milk price formula.

Fonterra states that it is entitled to include in retention, for the purposes of the default milk price, all after tax profits, including capital profits, not paid to shareholding farmers. Open Country disagrees, and argues that this is not the intent of the Regulations and distorts the purpose of the default milk price regime.

It is the Commission's preliminary view that the purpose of the Regulations is to ensure that independent processors pay the same price as Fonterra for raw milk. The wholesale milk price formula is intended to achieve this outcome by unbundling the value of milk included in the payout to Fonterra's shareholders. This price should not include any capital profits. However, the Commission considers that in this case the purpose of the regulations cannot be reconciled with the statutory language. It is, therefore, the Commission's preliminary view, in accordance with the statutory language, that capital profits from the divestiture of shareholding interests are entitled to be included in Fonterra's retention.

The Commission's draft determination is available on www.comcom.govt.nz . The parties have been asked to respond to the Commission by 5 December 2005.

Background

Section 126 of the Dairy Industry Restructuring Act 2001 requires specific matters to be in the Commission's Determination.
(1) A determination by the Commission must -
(a) state the Commission's decision on the matters in dispute; and
(b) state clearly whether a breach of {Subpart 5 of Part 2} or any regulations has occurred; and
(c) include the reasons for the determination; and
(d) include the terms and conditions on which the determination is made; and
(e) specify the actions that a party to the determination must do or refrain from doing, which may include (without limitation) payment of compensation by one party to the other.
(2) The Commission may specify an expiry date for the determination.

ENDS

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