Fonterra mulls revamp
Federated Farmers says Fonterra is moving in the right direction by reconsidering the dairy giant’s capital structure as its milk supply starts to decline.
Fonterra investors and farmers are digesting some radical ideas put forward yesterday to reshape the co-operative’s capital structure.
Chairman Peter McBride said the review had tried to strike a balance between the need for flexibility in terms of farmer equity, control over its milk supply and the price of entry for new farmers. ‘‘We have a choice to make, we either deal with this issue now or we pay for it later,’’ he said.
Federated Farmers dairy industry group chair Wayne Langford said it was ‘‘the beginning of a fairly long and extensive review’’ for Fonterra owners. But it was good to see the company front-footing issues like milk supply and ownership, ‘‘as well as future farm success and young farmers coming into the co-op’’.
Troubled by forecasts of a falling milk supply, the board’s preferred option is either to buy back and close, or cap, the NZX-listed Shareholder Fund.
Fonterra is overwhelmingly owned by its farmer suppliers, but in response to a growing need for outside capital, it allowed nonfarmers to invest in 2012 by listing units on the NZX.
However, the unit price influences the value of the farmer shares, which are traded in a separate farmers-only market.
Fonterra is also concerned about the shareholder fund getting too big and McBride said closing or capping the shareholders fund would keep the balance of power in farmers’ favour.
It would also ensure the share price was pegged to farmer values, which could make it cheaper for new generations wanting to get into dairying.
At the moment, the shareholder fund holds only about 6.5 per cent of the company but it has a 20 per cent threshold and, if it reached that size, would make buying back the fund prohibitive for farmers.
The other part of the Fonterra board’s proposal revolves around reducing the number of shares farmers need to be a supplier.
At the moment, farmers own a mix of production-related ‘‘wet’’ shares and unrelated ‘‘dry’’ shares.
Farmers can convert their dry shares to units on the sharemarket. But the total number of dry shares in the company is rapidly approaching its limit.
Fonterra has temporarily suspended that facility while consultation is under way.
McBride said that if farmers allowed the fund size threshold to expand, ‘‘clearly from our perspective that would put farmer ownership and control at risk ... It’s a ‘‘slippery slope to corporatisation’’.
Despite healthy milk prices in recent months a global glut of milk has taken the edge off the drive to grow New Zealand’s milk supply.
Mark Rivers, Fonterra’s chief financial officer, told a media briefing that going forward, Fonterra would be more ‘‘capital light’’, moving from debt-funded growth to a conservative balance sheet.
‘‘It’s quite a change from the [operation] before but now we’ve set that strategy – and I think the results we’ve seen over the past we have demonstrated that we are on the right path – now the time is right to look at the structure.
‘‘One of the things that is critical for sustainability for a co-op is to have sustainable milk supply. And so that is very much on our minds.’’