The big dairy co-op Fonterra has moved to make its capital restructuring proposals more palatable to its 10,000 farmer-shareholders as it seeks to slash the drastic entry cost to become a new supplier.
Faced with a future where total milk production is flattening, Fonterra needs more flexibility in its capital rules, the most burdensome of which has been the compulsory requirement to invest huge sums of capital just to supply.
The revisions now being put forward bear the stamp of chairman Peter McBride, who in an earlier role successfully carried the kiwifruit growers in Zespri through a similar capital restructure.
McBride, after taking the chair at Fonterra, soon realised the need for change in the one-size-fits-all compulsory capital structure requiring all shareholders to hold shares on a 1:1 basis. It has become a key factor in farmers deciding to leave.
Working over feedback since the first reform proposals were outlined in May, Fonterra’s board found several themes emerging, and now sees the need to re-shape several of them. One of the main worries revealed in the initial consultation related to the farmer-only market and its impact on the share price.
Changes being considered to the preferred option initially put forward include adjusting the proposed minimum shareholding requirement for farmers and enabling share milkers and contract milkers to own shares.
A minimum shareholding requirement of 33% of milk supply, or one share per 3kg/MS, could be required. The preferred option had previously been 25%.
The entry timeframe for farmers to join the co-op could be extended from five to six years, while current shareholders would be given more time to exit – up to between 10 and 15 years from five years.
“It’s a good time for the board to step back and reflect on the feedback as most farmers will now be busy with calving,” McBride says.
“Once they’ve come through this particularly busy time of the season, we’ll be ready to consult on the updated proposal.”
The objective of the capital restructuring is to ensure the co-op stays in farmers’ hands, while making it easier to join the co-operative and scrapping the shareholders fund – which allowed non-farmers to have an exposure to the company.
The company has also placed a temporary cap on the shareholders fund, which had contributed to about $2.2bn wiped off its market capitalisation.
Fonterra said there had been 90 meetings with farmers since the consultation opened, with 5000 farmers taking part in discussions.
“The board maintains its belief that, in a flat or potentially declining milk environment, making changes early will put us in the best position to provide farmers with more flexibility while protecting farmer ownership and strengthening our co-op’s financial sustainability,” McBride said.
“We have also reconsidered voting rights in light of some feedback and at this stage our preference is for voting to continue to follow share-backed supply as it currently does,” he said.
Fonterra said it would be following up with focus groups to test different aspects of the potential changes.
“This will help us as we continue to develop a more detailed proposal to present to farmers around the time of our annual results in late September for further consultation,” McBride said.
“At this stage, we are still aiming for a farmer vote at our annual meeting, which will be held in December.”
Given that the dairy industry in the Covid era has proven again it is the main prop of NZ’s export economy, it is vital its biggest unit gets its capital structure in a shape that attracts newcomers and sustains its leadership role in the industry.
Some critics have argued it is constrained by the very nature of being a co-operative but since that is what the majority of its members want, the refinement of its capital structure now being proposed is seen as essential. But it will call for all the skill McBride and his board can apply to get the job done.