Fonterra in ‘ludicrous’ situation over changes
With the prospect of this season’s farm-gate milk price looking closer to $9 than $8 and a significantly better-thanexpected free-trade deal with the United Kingdom, economically things are looking rosy for Fonterra farmers.
I was intrigued when the co-op announced it was looking to change its capital structure to make it easier for farmers to join.
The proposed structure would reduce the high capital investment required to supply it and allow farmers greater financial flexibility when they decide to leave.
Fonterra last changed its capital structure when it adopted Trading Among Farmers (TAF) in 2012. TAF was a response to the issue of farmers exiting Fonterra and redeeming their shares, meaning large sums of money were washing in and out, mainly out.
It addressed the threat to Fonterra’s balance sheet but ignored systemic problems like the high cost of becoming a Fonterra supplier and the fact suppliers were leaving the co-op in favour of independent processors which don’t require farmer investment.
The Minister of Agriculture Damien O’Connor said in May he would assist Fonterra’s board in speeding through the necessary law changes, so you would think all that would be needed would be a favourable farmer vote in December.
A recent email from Fonterra board chair Peter McBride poured cold water on that notion. The email contained a chilling paragraph: ‘‘At this stage, the Government is not in a position to support DIRA changes to facilitate our proposal, but we understand it wants to work with us to reach an outcome that works for both parties.’’
The news that O’Connor is no longer willing to amend the legislation is a sign that something has gone seriously awry behind the scenes.
We can expect Fonterra’s competitors will be lobbying hard for the status quo as any changes that would make it easier for farmers to join Fonterra pose a risk to their supplier base.
Another possibility is that the Government departments reviewing the proposed changes simply don’t like what they’re seeing, and if that’s the case, it would be a brave minister who went against the advice of his ministry without strong justification.
In the worst-case scenario, Fonterra and the Government are so far apart that the changes farmer shareholders will vote on next month will look nothing like what the Government is willing to implement. If so, this may end up being an opportunity wasted and the significant share value farmers have invested in the co-op will have been decimated for no reason.
The whole saga however highlights an important truth: After 20 years in existence Fonterra is still bound by legislation that tilts the playing field heavily towards its competitors. It is ludicrous that a company could take a democratic shareholder vote and the decision whether to enact the outcome is left to the Government.
DIRA needs to be scrapped, except for the milk price manual, and Fonterra and its farmer shareholders need to be free to chart their own course.