O’Connor now will support law changes needed for Fonterra’s capital restructuring

Agriculture  Minister  Damien  O’Connor has  overcome  his objections to  the  capital restructuring of  dairy giant Fonterra  and  says  the  government  will  now  amend the Dairy Industry Restructuring Act.

The dairy giant wants to make it easier to join the company, while maintaining farmer ownership amid falling milk supply.

O’Connor  recognises  Fonterra as a key part of New Zealand’s world-leading dairy industry and a major export earner for the economy, sending product to over 130 countries.

Around 95% of all dairy milk produced in New Zealand is exported, with export revenues of  $19.1bn a year. It accounts for 35% of NZ’s total merchandise exports and around 3.1%  of GDP. The industry employs around 49,000 people.

“The success of our dairy sector and the broader primary industries will underpin our economic recovery from COVID-19,”  O’Connor said.

“We’re proposing a set of amendments to DIRA that strike a balance between recognising the shareholders’ mandate for change and enabling the successful function of the wider dairy sector.

“The benefits of a high-performing and efficient Fonterra flow through its near 10,000 farmer-shareholders to our rural communities and across New Zealand’s economy.”

Fonterra’s shareholding farmers voted in December 2021 for a capital restructuring of the cooperative, which was formed through the enactment of the DIRA in 2001.

OConnor  says because of Fonterra’s size and influence in the New Zealand dairy sector, the Government needed to take into account any potential risks to the long-term performance, innovation, sustainability, and value creation in the wider dairy industry.”

“To that end we are also taking the opportunity to improve the transparency and independence of the raw milk price setting process, whilst also requiring a dividends and retention policy.

“It’s important that the amendments receive feedback and  a discussion paper has been released as part of consultation on the changes.”

The proposed DIRA regulatory amendments focus on:

  • Enabling Fonterra to partially delink the unit Fund on a permanent basis;
  • Improving the transparency and robustness of the governance and operation of the current base milk price-setting regime;
  • Supporting liquidity and transparency in the trade of Fonterra shares in its restricted farmer-only market;
  • Supporting Fonterra’s ability to access internal capital for investment in innovation.

Proposed changes would require farmers to hold a minimum of three shares for every kilogram of milk solids they produce, allow different types of farmers to own shares in the co-operative, and cap the size of the associated shareholder’s fund.

Earlier O’Connor  was not  sold on the idea of a capital restructure. He  said  then the proposals envisage a legislative change to remove key mechanisms that risk weakening performance incentives on Fonterra.

“Without alternative measures, I am not yet assured that these proposals would deliver the best long-term outcomes for farmers or the dairy sector as a whole,” he  said then.

He indicated  at that time  he was prepared to consider an alternative more balanced proposal from Fonterra which could meet Fonterra’s needs and the government’s wider policy objectives for the long-term interests of farmers, the dairy sector, and Fonterra itself.

And  that  is  said  to  be  the  case  that Fonterra  has  now  accepted.

Fonterra’s  chairman Peter  McBride  says the proposed DIRA regulatory amendments focus on:

• Specifically enabling Fonterra to cap the Fonterra Shareholders’ Fund on a permanent basis

 • Strengthening the transparency and independence of the governance and operation of the current base milk price-setting regime.

• Supporting liquidity and transparency in the trade of Fonterra shares in its restricted farmer-only market.

• Reinforcing the importance of Fonterra accessing internal capital for investment in innovation.

The Government also announced it would be consulting with interested and affected parties on the proposed amendments from April through May.

“The Government’s aspirations for our industry are well aligned to the Co-op’s. We all want a high performing dairy industry, and a successful and innovative Fonterra is central to that.

“A strong Fonterra can lead the industry, building New Zealand provenance, lifting the bar on environmental performance and ensuring sustainable returns for all New Zealand dairy farmers.

“A Flexible Shareholding model will help our Co-op maintain a sustainable milk supply. A globally competitive Co-op of scale is in everyone’s best interests.

“Fonterra’s scale efficiencies improve our ability to invest in on-farm support services, innovation, new market and product development – all of which creates value for New Zealand in terms of milk price and profits returned to rural communities, export performance, employment, environmental performance, and community development.”

McBride  says Fonterra  is  preparing to implement the Flexible Shareholding structure as soon as possible.  Share compliance obligations will remain on hold until at least six months after the effective date for the new structure.

The  co-op  says  it welcomes the Government’s support for the Flexible Shareholding structure and together with the Co-operative Council, it will be participating in the consultation process.

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