Farmers to mull implications of Fonterra shakeup

AUCKLAND: Proposed reform of Fonterra’s capital structure is a big deal its farmerowners will be chewing over for weeks, but what does it mean for prices at the dairy chiller and the company’s longago promise to be New Zealand’s national export champion?

New chairman Peter McBride, who is driving the proposal for major structural change at New Zealand’s biggest business, offers no comfort on the supermarket effect.

That was influenced by global commodity prices — strong right now — and largely out of Fonterra’s control, he said.

However, he was unequivocal about why reform was essential — and not just to fulfil the export performance pledge which propped up the dairy industry’s controversial case for creating Fonterra in 2001 under special enabling legislation.

Twenty years on, some observers say that promise has yet to be fulfilled, despite the world’s fifthlargest dairy company by revenue still controlling just under 80% of the New Zealand milk market.

Nor has it performed in recent years to the liking of its 10,000 farmershareholders.

They must buy shares to supply milk and in the past 10 years have invested $8 billion for lacklustre returns on their capital. Not long ago there were large splashes of red on the balance sheet.

At the same time, Fonterra is facing an existential crisis about its cooperative future as milk supply volumes falter, environmental compliance costs rise, banks shy from dairying exposure and land use swerves to horticulture.

‘‘Our concern is over time we lose our scale and efficiency, which will impact on the milk price, which will have a profound impact on wealth in New Zealand and the economy,’’ Mr McBride said.

Capital from shareholders could get scarce. But those same farmers remain fervent about retaining ownership and control of Fonterra.

To do that they must keep supplying milk to it and buying shares for the privilege of belonging to the industry’s export big cheese and receiving the best possible market price for their milk. (New Zealand’s tiny consumer market means it has to export 95% of milk production.)

Emerging export competitors do not require shares to supply milk but do not have Fonterra’s market clout or cooperative spirit either.

All this is where the proposal for a big change in capital structure — and export performance — comes in.

Recognising today ‘‘cash is king’’, and that the present capital structure, a clunky hybrid of sharemarket listed, publicly available units in farmerowned shares and a separate farmeronly trading market is not futureproof, Mr McBride and his board propose relaxing Fonterra’s share standard and axing, or capping, the listed Fonterra Shareholders’ Fund.

The board favours the chop for the fund, which is likely mostly farmerowned anyway, having lost favour with public investors.

Farmers would be given much more capital flexibility in the number of shares they must hold on entering or exiting the cooperative.

The overall result of the proposed change would likely bring all securities trading back within Fonterra, resulting in a farmersonly market.

Exiting or downsizing farmers would sell to other farmers — new entrants or expanding operators — so maintaining Fonterra’s lifeblood milk supply.

This restricted trading would possibly result in a drop in the value of Fonterra shares, at least initially.

Mr McBride said that was the biggest issue farmers would have to get their heads around in coming weeks as directors hit the road to discuss the reform proposal.

Farmers contacted identified the issue as an initial concern.

However, Mr McBride said the effect would be shortterm and what was at stake was the longterm future health of the cooperative and the economic return of farmer investment. — The New Zealand Herald