Fonterra’s capital restructure plan won’t be a shoo-in with its farmers

“Uncertainty” is the red-letter word among thousands of Fonterra farmers as leaders of New Zealand’s biggest business guide them through the nuts and bolts of a proposed capital restructure.

The Fonterra Cooperative Council, which represents the interests of the farmer-owned co-operative’s 10,000 shareholders and suppliers, said uncertainty about what the proposed new structure might bring “is the hardest thing for farmers to get their heads around” as the first stage of Fonterra leaders’ nationwide consultation ticks down to an end this month.

Council chairman James Barron said part of that uncertainty stems from the proposal to shift the reason for owning shares in the big co-operative from compliance to choice.

Part of the board’s preferred option for a capital restructure of the world’s fifth-biggest dairy company by revenue is to relax its share standard – the amount of share money a farmer must have to stump up each year in order to buy shares to supply milk and join the co-operative.

To address Fonterra’s need to capture a sustainable milk supply in a flatlining and likelyshrinking national milk production landscape, its leaders propose relaxing the share standard from one share purchase for every one kilogram of milk solids supplied, to one share for every four kg.

The other part of the proposal is to wind up or cap the listed Fonterra Shareholders’ Fund, which enables Fonterra farmers to convert their non-milk-supply shares into dividend-carrying, non-voting units, and the public to buy units in Fonterra shares.

Overarching everything in the capital restructure debate is the ambition to retain farmer ownership and control of Fonterra.

The tricky balancing act is if the fund size is capped at the same time as the share purchase requirement is relaxed, farmers will be left with a restricted share market, the only measure of economic value in share investment in Fonterra through their farmer-only share trading market.

The value of those shares will be driven by Fonterra’s financial performance, which for 10 years has been disappointing on the back of $8 billion of farmers’ capital investment, according to sharemarket analysts.

Barron said that issue brings some uncertainty.

“We’re having this discussion at a time when Fonterra is embedding a new [business] strategy and farmers have yet to have good confidence in the results that flow out of that.”

In an update to shareholders, the council said farmers are seeking more confidence about performance and future earnings “as the delivery of earnings in a farmer-only market is seen as the key driver to share value”.

The council said common questions at meetings and webinars included if there is too much flexibility, will shareholders trade a large number of shares after the change to the share standards, impacting share value; who will be the buyers of shares in a 1:4 scenario, and given farmers are a diverse group of investors, in times of financial difficulty such as drought, will many seek to share down?

The council said for loyal and shared-up suppliers there appeared to be a trade-off between protecting current value in shares and providing flexibility to ensure a sustainable milk supply.

“But does the preferred option have the balance too tilted in favour of the enduring co-operative and newcomers to the co-op, not long-term or fully shared-up suppliers?”

Barron told the Herald an issue about capping or axing the listed fund “coming through loud and clear” was that farmers valued the ability for non-milk supplying parties to invest in the market.

“That’s contract milkers and sharemilkers and ex-farmers. That’s a message the board has heard. These days there are more and more career sharemilkers and some of them see the benefit of being invested past the farmgate. That’s the value they see in the fund.

“It’s the same with contract milkers and shareholders of the future. Then there’s people at the other end of their careers, either going to exit or have exited and wanting to maintain links to the industry and leave some equity invested in the co-operative. They want some way to participate.

“That’s been heard by the board and the council.”

The proposal requires the support of the farmer-elected council as well as 75 per cent approval in a shareholder vote. The administrative board of the fund also has to give it the tick. The board hopes to put a capital restructure proposal to the November annual meeting for a vote.

While Fonterra farmers have plenty of questions about the current proposal, which may see some modification work by leaders over July and August before a second round of farmer consultation, their turnouts to meetings and webinars have pleased Fonterra organisers. And farmers had contributed many good ideas which had been listened to.

Barron said a council survey of farmers showed 82 per cent of respondents were content with Fonterra’s performance.

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