Capital restructuring is one big issue for Fonterra farmers – but they must respond to environmental challenges, too

Just  as  the  dairy  season  hits its  peak, Fonterra   farmer-shareholders   are  confronted with a  key decision on the  capital  structure  of the  big co-op. The board is  asking  them to  vote on the  proposal  at the annual meeting next month.

Consultation on the proposal with farmer-owners has been ongoing throughout the year, with some tweaks announced in September before a second round of discussions.  But Fonterra leaders have been clear they wouldn’t put the reform forward for voting if they believed the support wasn’t there

Farmers have  had  little  time to  enjoy  the  news  that  the  co-op  has  raised  its  forecast  payout  for  the current  season  to  a  record level.  Nor  is the  capital structure the  only  issue triggering  worry in the  cowshed.

The  government’s  focus  on climate  change, particularly methane  emissions, is  another matter weighing on the  industry, exacerbated by outfits like  Greenpeace shouting  the  odds  about “industrial  farming’’  and  “dirty dairying”.

Point of  Order believes it is  vital   the industry’s  leaders — and,  for that  matter,  the rank-and-file — keep  their  equilibrium  and maintain  a  steady  course  as  they  deal  with these issues.

The  need  to  bring  global warming   under  control  is plainly vital for the  world, but so, too, is the  production of  foodstuffs.

Under  the  leadership  of  current  CEO  Miles  Hurrell, Fonterra  is  determined  to fulfil the  promise  held out  when it  was  first  formed  of  becoming  a  global  leader.

Without  much  fanfare  the  co-op recently  said it has agreed to a deal  with a US biotech company VitaKey which will result in it designing dairy products that incorporate targeted and time-controlled release of  specific nutrients.

VitaKey was founded by chemical engineer and billionare Dr Robert Langer, who also co-founded Covid-19 vaccine maker Moderna.

Fonterra wants to use VitaKey technology to direct dairy nutrients, initially in the form of probiotics, to specific parts of the body so they will be more active and beneficial.

Fonterra’s Asia Pacific region chief executive, Judith Swales, says the move is part of its long-term strategy to be a leader in dairy innovation and nutrition science.  Fonterra believes many foods in the future will be more valued for their specific health benefits and it wants to appeal to these consumers.

It has one of the largest dairy culture libraries in the world, with its research and development centre containing more than 40,000 strains. Two of these strains, LactoB 001 and BifidoB 019, address key health concerns such as digestive issues and immunity and are recognised as being in the top five global probiotics.

Langer said the Covid-19 pandemic has underscored the need for solutions to enhance people’s health and wellness.

“My feeling is that this is just the start of what, I hope, will be a revolution in nutrition, just like I’d like to think that’s what we’ve done at Moderna and other places in terms of medicine.”

Fonterra’s farmer  shareholders therefore have  a lot  on  their  plate when  they  get to the  vote  on  the    capital  structure  of  their  co-op. Where  one  might  not  have  bet  on the  outcome  when  it  was  first  mooted  it  may  have  a    better  chance  now.

Earlier  this  week   the  NZ  Herald noted  that the proposal, which sets new shareholding requirements to have milk accepted, opens share buying to additional farmer classes such as sharemilkers and caps the existing Fonterra listed unit fund, requires a 75% vote of support from the company’s 10,000 shareholder base.

The overall limit on the size of the fund would be reduced from 20% to 10% of total shares on issue, Fonterra said in a statement to the NZX. This is instead of having a total ban on any further farmer shares being exchanged into units, it said.

This recognises that the fund size, which is currently around 6.75% of total shares on issue, could change from time to time subject to the overall limit. Shares will not be able to be exchanged into units on a day-to-day basis and the board retains its current rights to regulate this process,” the statement said.

Another change from the September version of the proposal is the introduction of thresholds to support the alignment of share ownership and milk supply and to reflect Fonterra’s intention that the total number of shares on issue in the co-operative is within plus or minus 15% of total milk supply and that the proportion of shares held by ceased suppliers is less than 25% of shares in the cooperative.

These changes and the cap level were in response to the latest round of consultations with farmers and the independent directors of the Fonterra Shareholders Fund, the unit fund, Fonterra said.

The farmer-elected co-operative council had voted 92% in support of the recommended reform.

Because Fonterra was created under statute, the Dairy Restructuring Act 2001, the restructure requires Cabinet approval. This is not assured and may take time, judging by documents released under the Official Information Act.  

These suggest Ministry for Primary Industries staff analysis and resources would not be devoted to the restructuring until it is seen if shareholders vote for it next month, which means relevant ministers would not consider policy recommendations until after the vote.

Fonterra’s board wants the capital shakeup to support a sustainable supply of New Zealand milk that the company’s long-term strategy relies on.  Milk production in this country is flatlining and tipped to decline due to environmental pressures, new regulations and alternative land uses.

Competition is also a threat. While still collecting the bulk of national milk production, Fonterra faces increasing competition for milk from emerging and expanding independents.

NZ’s biggest business wants to make entry into and exit from the co-operative more flexible, make membership more attractive by easing capital requirements, and protect farmer-only ownership by restricting the listed market for shares and units. The unit fund will be capped and the existing farmer-only share trading continue.

When the proposal was first announced in May and a temporary halt imposed on farmers exchanging shares for units, the price of farmers’ shares tanked.

McBride said that in the first round of consultation with farmers, reaction initially was all about the share price.

“But on the journey has come a deeper understanding that it’s all about the medium to long term sustainability of the cooperative – and that’s really important to them as well.

“They’re much more supportive and more coming to terms with it. Capping the fund was the issue, but the second time it’s more positive and there’s better understanding of the issues.”

As part of the reform package, Fonterra proposes additional measures to support liquidity in farmer-only market, recognising there could be lower share trading levels, so the share price could move more on small volumes. These included allocating up to $300 million to support liquidity as farmers transition to the new structure, through an on-market share buyback “and other tools”.

Chief executive Miles Hurrell said shareholders’ fresh confidence in the co-operative had given the company confidence to take the proposal to vote.

Hurrell said Fonterra’s reset business strategy had gained momentum since the September disclosure.

The milk price forecast had lifted, the food service business had hit $3 billion revenue, and last week a major collaboration had been announced for scientific nutrient development with big US biotech company VitaKey.

Lab trials on reducing methane emissions had graduated to farm trials, he said.

Against  Hurrell’s optimism  must be  set the negativity of  Greenpeace, which noted the international Climate Change Performance Index (CCPI) released  this  month downgrades NZ efforts toward climate change reduction seven points from last year’s ranking, to 35th place. NZ is now among the low-ranking countries of the world in moves to address climate change through meaningful action.

The CCPI rates NZ ‘low’ for greenhouse gas emissions, and the country has dropped to ‘low’ for climate policy. NZ’s performance overall was marked down because of the free pass given to our largest emitter – industrial agriculture.

The CCPI also notes that NZ’s ‘Zero Carbon’ Act contains no policies for cutting emissions, or appropriate measures to fully meet the 2050 target.

“Industrial dairy, driven by massive quantities of synthetic nitrogen fertiliser, is at the heart of the Ardern Government’s failure to deliver on climate. In terms of emissions – dairy is to NZ what coal is to Australia. Until this Government acts to cut synthetic nitrogen fertiliser and lower dairy stocking rates it is failing on climate”, says Greenpeace Aotearoa lead agriculture campaigner Christine Rose.

A new report released this  month by the Environmental Protection Authority (EPA) further highlight agriculture’s significant greenhouse gas emission footprint, which is more than NZ’s domestic coal, gas and petrol/diesel transport emissions combined.

Rose says the EPA report highlights that the dairy industry and “its fertiliser industry enabler”  are “the country’s biggest climate criminals”.  

“It’s no wonder that NZ’s credibility is in tatters at the COP 26 climate conference, the Ardern Government has failed to take meaningful action on our biggest climate polluter – industrial dairy” she said.

“Add to that, polluted rivers, contaminated drinking water and biodiversity losses here and abroad, industrial dairying is an environmental ‘smoking gun’, loaded with fertiliser, too many cows, and a government that’s failing to address it.”

Stats NZ data show farms that were dominantly dairy had the largest amount of fertiliser applied to agricultural land in 2019 – 836,000 tonnes (49% of the NZ total).  Farms that were dominantly dairy had the largest amount of nitrogen applied to agricultural land – 223,000 tonnes (67% of the national total).

 Greenpeace says NZ’s synthetic nitrogen fertiliser use increased 663% between 1990 and 2019, during which time the dairy herd increased by 82% from 3.4m cows to 6.3m. 98% of the country’s synthetic nitrogen fertiliser is distributed by two companies – Ravensdown and Ballance.

It further says synthetic nitrogen fertiliser and dairy cow urine are major causes of nitrate contamination of drinking water linked to 40 bowel cancer deaths every year in New Zealand according to a scientific study published this week.

Greenpeace is calling for the government to phase out synthetic nitrogen fertiliser, lower stocking rates, and support farmers to move to regenerative organic farming for the good of the climate, rivers and human health.

But Greenpeace’s alarmism is countered by Dr Jacqueline Rowarth, Adjunct Professor at Lincoln University,  science advocate and communicator, agri-environmental analyst and commentator, and  a farmer-elected Director of DairyNZ and Ravensdown.

Rowarth says when it comes to nitrate in drinking water, we should stop adopting a “start worrying – details to follow” approach and start listening to science.

It is highly unlikely that nitrates in drinking water or the diet present an increased risk of cancer.

ESR has reviewed the research and assessed biology, chemistry and exposure. They concluded that there is no link.

The research was done by experienced researchers in one of New Zealand’s Crown Research Institutes (CRI), and was, as is normal, checked before release.

Further encouragement for dairy farmers comes from a paper published by CSIRO Publishing (in 2019)  headed Water-quality issues facing dairy farming: potential natural and built attenuation of nitrate losses in sensitive agricultural catchments

It says:

Dairy farming will be increasingly scrutinised for its environmental impacts, in particular for its impacts on freshwater quality in New Zealand and elsewhere. Management and mitigation of high nitrate losses is one of the greatest water-quality challenges facing dairy farming in New Zealand and other countries. Management of critical flow pathways and nitrate-attenuation capacity could offer potential solutions to this problem and help maintain dairy-farming productivity, while reducing its water-quality impacts.

As  we  said   earlier  in this  essay:  there’s a  fair  bit to ponder.

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