Independent dairy processors have suggested that Fonterra is distorting milk pricing by leaving less profitable products such as casein out of its calculations for setting the price it pays farmers.
They say that by doing that, Fonterra is effectively increasing the raw milk price which flows through to the consumer.
Parliament's Commerce Committee finished hearing submissions in its milk price inquiry on Thursday.
It heard from Fonterra, the co-operative's shareholders council and some of the processors who buy milk that Fonterra is required to supply under the dairy industry regulations.
The chief executive of Canterbury's Synlait dairy company, John Penno, told the committee that New Zealand consumers have been constantly hearing that international commodity prices are what determines the domestic milk price.
But he says Fonterra's milk price manual, made public last week, revealed its practice of leaving the least profitable 30% of products out of its calculations and that needs to change.
Mr Penno says Fonterra should be made to price milk off the international returns for its full commodity basket using its actual returns and their actual costs.
Fonterra chief financial officer Jonathan Mason said including low-priced products such as casein in the calculations would have its own distorting effect on the dairy industry.
He said putting old inefficient casein plants into the milk price would encourage less efficient competition and fragmentation in the industry.
Regulatory framework not adequate
The biggest independent dairy processor, Open Country, told the select committee that the current regulatory framework under the Dairy Industry Restructuring Act doesn't have the clout to deal with milk price issues effectively.
Chair Laurie Margrain says the normal market forces that drive competition don't apply, because Fonterra controls some 90% of the milk supply.
He says the select committee should focus on creating an environment that allows competition because fresh milk pricing is driven by the degree of competition at the farm gate.
An economist who's been advising the independent processors, Peter Fraser, reinforced the message about Fonterra's dominance in the local milk market.
He says New Zealand needs a firm that can foot it with the big guys in the world, but it must not be allowed to be a bully at home.
Mr Fraser says when there is a company collecting 90% of any product and it's allowed to set its own milk price, its own share price and its own dividend policy with absolutely no oversight from regulators, the committee needs to pay serious attention to it.