Minister keen to help with changes to Fonterra
Agriculture Minister Damien O’Connor says he will assist Fonterra’s board in speeding through change in dairy industry law to accommodate a capital restructure.
The dairy co-operative’s board hopes to put a proposal for significant capital structure change to a vote by its farmerowners around the time of the November annual meeting, but it will also require an amendment to the Dairy Industry Restructuring Act (Dira), which oversees New Zealand’s biggest business and the $10 billion dairy industry.
O’Connor, a fierce critic of Fonterra’s current capital structure when it was introduced in 2012 under a scheme called Trading Among Farmers (Taf), told the Weekend Herald that when he first discussed the company’s capital structure review with its leaders, he saw a need for urgency in amending the legislation once final decisions were made.
Fonterra directors next week start one of two planned rounds of consultation and meetings with farmer-shareholders around the country, over the change proposals unveiled this week.
Those proposals — to significantly relax Fonterra’s share standard to give farmer entrants and exiters more flexibility in their capital commitment to the co-op, and to cap or axe the Fonterra Shareholders’ Fund — will require 75 per cent support in two votes as well as the legislation tweak. One vote will be among farmers and the other among unit-holders in the fund.
The proposals aim to address Fonterra’s concerns about losing scale and efficiency if its lifeblood milk supply dwindles.
“I understand the dilemma they face and I’m not surprised, given my consistent view that Taf was always going to fail the co-operative,” O’Connor said.
The pressure on milk supply comes from a range of sources including rising environmental compliance costs; emerging competitors which, unlike Fonterra, don’t require shares to supply milk; land use change; and ultimately, dairy observers say, Fonterra’s lacklustre financial performance.
Share-buying farmers have invested $8 billion in Fonterra in the past 10 years for disappointing returns.
The company, which is the world’s fifth biggest dairy company by revenue and its largest dairy exporter, two years ago launched a new business strategy under new management.
It focuses on the premium value of New Zealand milk instead of costly and largely loss-making global milk pools.
The balance sheet is recovering from heavy losses in 2018 and 2019, and an almost new board says it wants a structure that aligns with strategy.
Nearly 20 years on from its controversial creation from a dairy industry mega-merger, enabled by the special Dira legislation, which also deregulated dairy exporting, Fonterra still collects and controls the lion’s share of New Zealand’s raw milk supply. On formation in 2001, it controlled 95 per cent.
O’Connor said he couldn’t make a judgment on the proposals yet. But given the new board’s effort “to maximise the value of New Zealand milk, retain its co-operative status and the need for it to grow successfully, I fully understand what they’ve done”.
Taf’s introduction in 2012 followed years of debate and controversy among farmershareholders. Milk production was soaring and Fonterra farmers were convinced by their then-leaders of the time that the cooperative needed to guard against “redemption risk” — a run on capital as farmers exited with cash to join new competitors which didn’t require share purchase.
O’Connor, in Opposition at the time, claimed the Taf legislation was rushed and Fonterra executives “were incentivised through their salaries to have an increasing share price . . . basically a flawed concept and driver for a cooperative company”.