6 May 2021

Fonterra lays out options to strengthen financial future

4:07 pm on 6 May 2021

Dairy giant Fonterra has laid out a range of options to strengthen its financial structure, but remains committed to co-operative ownership.

Fonterra milk truck

Chairperson Peter McBride says the capital structure review aimed to ensure the sustainability of the co-operative into the future. Photo: RNZ / Rebekah Parsons-King

The country's biggest company said the aim was to balance farmer ownership, milk supply, and secure its financial future.

Among the options put out were dual share structures to allow outside involvement, splitting the co-op between supply and processing businesses, and different classes of shares.

Chairperson Peter McBride said the capital structure review aimed to ensure the sustainability of the co-operative into the future.

"The co-op's future financial sustainability relies heavily on our ability to maintain a sustainable New Zealand milk supply and protect farmer ownership and control."

Capital structure options the co-op is consulting on:

  • Dual share structures, which would move from the current single Co-operative share to a compulsory supply share and a separate non-compulsory investment share
  • Unshared supply structures
  • A traditional nominal share structure
  • A split co-operative model

McBride said to allow Fonterra's farmers to have open conversations and consider all options during consultation, it was temporarily capping the size of the Fonterra Shareholders' Fund by suspending shares in the Fonterra Shareholders' Market from being exchanged into units in the fund.

"The decisions we've already taken in response to the findings of the review - like temporarily capping the size of the fund - haven't been made lightly," he said.

Some of the options the co-operative was asking its farmers to consider included buying back the fund.

If the temporary cap was not in place, anyone holding "dry shares" - those shares held in excess of the "wet share" requirement linked to milk production - would have been able to exchange them into units in the fund during consultation, McBride said.

That could have more than doubled the size of the fund and made the option of buying it back unaffordable in the context of the co-operative's current balance sheet targets.

Fonterra said it believed the best option was move to a structure that reduced the share standard so farmers had greater flexibility, and either remove the fund or caps the fund from growing further to protect farmer ownership and control.

That would make it easier for new farmers to join the co-op and give more flexibility to existing farmers who may want to free up capital or who were working through succession, it said.


"A key outcome of this change is that shares would be bought and sold between farmers in a farmer-only market.

"These changes could impact the price at which shares in our co-op are traded, and there may not be as much liquidity in the market. Ultimately the price for farmers' shares would be determined by the performance of the co-op and trading between farmers."

Fonterra said it believed that was a more sustainable proposition over the longer term than the alternatives it was confronted with.

Why the co-op is looking at alternative capital structure options

Fonterra said the environment it was operating in had changed a lot over the last decade.

The co-operative said it needed to be prepared for flat or potentially declining milk supply as a result of factors such as climate change impacts, regulatory changes, and alternative land uses.

Declining milk volumes or more flexibility for farmers' shareholding requirements could cause the fund size to grow significantly, Fonterra said.

That would meant the thresholds that were put in place to help protect farmer ownership and control could be exceeded within the next few seasons.

Over the coming months, the co-operative's farmers would be given the chance to share their views through a series of meetings, webinars and other forums.

'Nest eggs' may be 'at risk'

Whitianga dairy farmer and Fonterra supplier Dirk Sieling said the proposed changes could suit young farmers wanting to join the co-op.

But at first glance he was worried what it would mean for shareholders, like himself, who were about ready to retire and cash in their chips.

"They might end up suffering. They have bought shares at tremendous cost. Over the years they've had little or no dividend on those shares and now there's a real risk that the market will go down because demand will be reduced.

"When they thought they had a nice little nest egg, in the form of Fonterra shares, that may well be at risk."

Sieling said with 75 percent support needed to get any change across the line Fonterra could struggle to convince ageing shareholders.

He said if Fonterra wanted to shore up its milk supply there were other places to look.

"The biggest barrier to new people coming in is when Fonterra can't pay as much as other companies do, and that is a lot to do with the efficiency of the company.

"Having said that, I think Fonterra is on the right track, I think they have improved their efficiencies, but they still have a long way to go."

Sieling previously sat on the Fonterra shareholders council and believed the current structure had proven itself to be fit for purpose.

He said the co-operative had shown in recent years it was possible to have 100 percent control - without 100 percent ownership.

"Why is there this Fonterra spin whereby they say that ownership and control are one and the same? It's well proven that that's not necessarily the case."

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