New chapter for Fonterra as Parliament passes DIRA amending bill, but a fresh climate challenge looms

NZ dairy giant Fonterra expects to have its  new capital structure in place by March after Parliament gave a final reading  this week to the Dairy  Industry Restructuring Amendment Bill. It had the support of Labour, National, and Act, with the Greens and Te Pati Maori  voting against it,  as they did during the first two readings. 

It marks a new chapter for the big co-op at a time when the industry has been hit by soaring inflation-driven farm costs and the Ardern government’s move to tax farm methane emissions.

Fonterra  as a key element  of the dairy industry  has made significant progress with its turnaround 2030 business strategy; and the proposed capital restructure is designed to  ensure its many processing  sites remain full in flatlining, and predicted to decline, national milk production.

The  restructure needed Parliament’s approval because  Fonterra was created by enabling legislation in 2001, and because  a feature of it, delinking the farmer share market and the unit market, could have faced legal challenges.

Even though  the DIRA amending legislation  attracted  criticism in the Select Committee  hearings that it would  weaken competition  in the industry, Agriculture  Minister Damien O’Connor pushed it through Parliament. In the process, he took the  opportunity as he saw  it  to improve the transparency and robustness of the governance and operation of the current base milk price-setting regime.   

Meanwhile  Fonterra is  moving ahead with investment targets for sustainability, higher value  products  and research  and development. Its milk payment for last season totalled $13.7bn and after the sale of its Chilean asset Soprole, plans a return of capital to shareholders  and unit holders.

 As CEO Miles Hurrell told the company’s  annual meeting, the last financial year was a year like no other.

 Now, there  is  a new  challenge  looming. Fonterra has indicated it may set itself a target for scope 3 carbon emissions. Scope 3 encompasses carbon emissions not produced by the company itself,but by those it is indirectly responsible for, including  farmers.

Chairman Peter McBride points out that in setting  a scope 3 target Fonterra  can help itself to maintain competitive access to key international markets. “For example, the EU  has proposed a carbon border adjustment tax on certain carbon-intensive goods. They are  subject to a carbon-emissions price via  the EU’s Emissions Trading Scheme. Agriculture  is not currently in scope  but it is  possible  it will be brought into the scheme”.  

McBride  expects such barriers to become more frequent  as governments  respond to their own climate commitments.

(With acknowledgement to Andrea Fox  of the NZ Herald for material  in this comment).