Uncertainty as farmers try to grasp restructuring

AUCKLAND: ‘‘Uncertainty’’ is the redletter 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 restructuring.

The Fonterra Cooperative Council, which represents the interests of the farmerowned cooperative’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 stemmed from the proposal to shift the reason for owning shares in the big cooperative from compliance to choice.

Part of the board’s preferred option for a capital restructure of the world’s fifthbiggest 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 cooperative.

To address Fonterra’s need to capture a sustainable milk supply in a flatlining and likely shrinking national milk production landscape, its leaders propose relaxing the share standard from one share purchase for every 1kg of milk solids supplied, to one share for every 4kg.

The other part of the proposal is to wind up or cap the listed Fonterra Shareholders’ Fund, which enables Fonterra farmers to convert their nonmilksupply shares into dividendcarrying, nonvoting units, and the public to buy units in Fonterra shares.

Overarching everything in the capital restructuring 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 farmeronly 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.

Mr Barron said that issue brought 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 were seeking more confidence about performance and future earnings ‘‘as the delivery of earnings in a farmeronly market is seen as the key driver to share value’’.

The council said common questions at meetings and webinars included whether there was too much flexibility, would shareholders trade a large number of shares after the change to the share standards, affecting share value; who would be the buyers of shares in a 1:4 scenario, and given farmers were a diverse group of investors, in times of financial difficulty such as drought, would many seek to shed shares

The council said for loyal and sharedup suppliers there appeared to be a tradeoff between protecting the current value in shares and providing the flexibility to ensure a sustainable milk supply.

‘‘But does the preferred option have the balance too tilted in favour of the enduring

❛ 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 Fonterra Cooperative Council chairman James Barron

cooperative and newcomers to the coop, not longterm or fully sharedup suppliers?’’

Mr Barron said an issue about capping or axing the listed fund ‘‘coming through loud and clear’’ was that farmers valued the ability for nonmilk supplying parties to invest in the market.

‘‘That’s contract milkers and sharemilkers and exfarmers.

‘‘These days, there are more and more career sharemilkers and some of them see the benefit of being invested past the farm gate.’’

The proposal requires the support of the farmerelected council as well as 75% approval in a shareholder vote. The administrative board of the fund also has to approve it. The board hopes to put a capital restructuring proposal to the November annual meeting for a vote.

While Fonterra farmers have plenty of questions about the current proposal, which may have some modification work done by leaders over July and August before a second round of farmer consultation, their turnouts to meetings and webinars have pleased Fonterra organisers.

Mr Barron said a council survey of farmers showed 82% of respondents were content with Fonterra’s performance. — The