Fonterra says it spent $14 million in the past season supplying subsidised milk to its competitors - and wants the rules changed.
With news this week that all four newly established dairy processors have cornerstone or foreign ownership, Fonterra has started to question the benefits to New Zealand of supplying up to 50 million litres of raw milk a year at a subsidised price to those companies.
The dairy giant's legal counsel David Matthews said under the Dairy Industry Restructuring Act (Dira), Fonterra has to supply competing companies with raw milk, both to existing and new processors, and to companies competing with Fonterra on the domestic market.
Mr Matthews said new dairy processors were sourcing the bulk of their raw milk needs from contracted suppliers, but topping up with subsidised milk from Fonterra.
Under Dira's requirements, Mr Matthews said Goodman Fielder was supplied with up to 250 million litres a year for its dairy products sold on the domestic market, but competing processors were each given up to 50 million litres a year.
"What they are doing is going out to source their own milk.
"If they have a 200 million-litre plant, then they will source 150 million litres, then dial up Fonterra to get 50 million litres."
Under the Dira milk pricing formula, it cost Fonterra $7.53 a kg of milk solids for the milk last season, for which it received $7.24 a kg from the processor.
"This discount or subsidy or whatever you call it, comes out of the pockets of farmers."
He believed one competing dairy processor paid their suppliers $7.75 a kg this season, but topped up its production needs with milk 22c a kg cheaper bought from Fonterra.
The dairy giant has been criticised for rising consumer dairy prices, but has been selling milk to competing processors who have been turning it into products for export.
Mr Matthews said the company had no problem with competition, but said the new export-focused dairy companies were providing little or no benefit to the domestic dairy market.
"They've got the subsidy, so why not ram it back into the domestic market."
Fonterra's concern has been accentuated by foreign investment in competing processors and benefits from the subsidised milk being enjoyed by foreign owners.
New Zealand Dairies is now fully owned by Russia-based Nutritek, Dairy Trust is 25% owned by Olam, from Singapore, Synlait is 14% owned by Japanese corporation Mitsui and Mataura Valley (which plans to build a plant near Gore) also has overseas backing.
He appreciated foreign companies were securing access to a food source, but he felt they should be paying market rates rather than subsidised prices for milk.
Mr Matthews said the Ministry of Agriculture and Forestry estimates it would take another three years before competition reached a level required by the Dira that would allow Fonterra to stop supplying raw milk to competitors.
