When Fonterra was formed in 2001, legislation was enacted ensuring a maximum of 5% of milk collected be handed to its competitors, to avoid a "monopoly" situation.

Among a raft of suggestions, the NZ Government has proposed Fonterra must supply 200m extra litres of milk each year at a cheaper price over the next three years. Competing processors would then have to rely on their own supply agreements.

Fonterra is unhappy having to provide more milk to its competitors, including multi-national companies with their own supply competing against the NZ cooperative in international markets.

Fonterra chairman Henry van der Heyden said the Government had not listened to submissions from Fonterra suppliers.

"The surprise factor was 200 million more litres over three years needs to go to independent processors which will ultimately be exported.

"It is not about the domestic market, it is about the export market.

"There are about six processors buying from us for export; four of the six have foreign ownership from outside New Zealand."

NZ Primary Industries Minister David Cater said he was disappointed with Fonterra's reaction.

"Within three years (foreign owned companies) will no longer be eligible for that milk. Current legislation allows them to access that milk ad infinitum."

Fonterra Shareholders Council chairman Simon Couper said the proposal defies logic.

"There is no successful example in economics where a business is forced to subsidise its competitors.

"Furthermore, the Government provides no guarantee the extra milk proposed to be made available to competitors would bring benefits in the form of cheaper milk to the New Zealand public or that the profits generated would remain in New Zealand.

"The suggested three-year finish is a good step. But how can farmers trust that in three years this aspect won't be changed, given that last year the minister assured farmers there would be no increase to our 600 million litre DIRA obligation?

"The Government's legislation proposes New Zealand farmers subsidise increasingly foreign-owned, established processors who do not need DIRA milk to compete."

New Zealand's second-largest dairy processor says the proposed time limit will stifle opening of new processing plants.

Open Country Dairy chairman Laurie Margrain said newer companies wouldn't cope without Fonterra milk. They couldn't become effective competitors in the marketplace in the three year period, he said.