Fonterra’s exit from Australia ‘a major event’
Fonterra’s impending exit from the Australian dairy industry is a major event but the story doesn’t change too much for farmers.
Fonterra Shareholders Council chairman James Barron says the next few months will be crucial for the co-op's 10,500 farmers.
"Therefore, it is important for them to turn up at meetings and have their say about the co-operative's capital structure," he told Dairy News.
"For farmers this is not only about their individual farming business but the continuation of Fonterra as an inter-generational co-operative in the future," he says.
Barron says the council has been briefed on all the options on the table.
Over the next few months, councillors will accompany the Fonterra board and management as they seek feedback from farmer shareholders.
Barron says the council has a dual role to help farmers shareholders understand the options on the table, and ensure farmer perspective back to the board.
To help farmers, the council will engage external advisors who will provide their views on the proposal.
Post consultation, the council will work with the board to make any variations needed to get the final proposal over the line at the co-op's annual meeting.
Barron says the review process could be unsettling for some farmers but he urges them to be part of the discussions.
Fonterra chairman Peter McBride says the co-op is providing options so that all farmer shareholders can have a discussion and decide the best option.
"We are not saying here's our capital structure proposal, take it or leave it," he says.
"It's about understanding the hearts and minds of our shareholders; it's not the mind that just matters, it has to be the heart."
The co-op last reviewed its capital structure 10 years ago when Trading Among Farmers was introduced. Back then milk supply was growing rapidly in New Zealand. It now needs 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, says McBride.
"Our co-op's financial performance will always be the main determinant of our share of New Zealand milk.
"But we also know that a more flexible capital structure, that caters for the diversity and different aspirations within our co-op, would support a sustainable future milk supply. This is critcial for us to deliver our strategy, which prioritises New Zealand milk."
Fonterra warns that declining milk volumes or more flexibility for farmers' shareholding requirements could cause the Fonterra Shareholders Fund size to grow significantly. That would mean the thresholds that were put in place to help protect farmer ownership and control could be exceeded within the next few seasons.
"To stay within the Fund size thresholds, our co-op would need to take action - such as buying back shares or units or increasing the thresholds to allow a greater degree of external investment. We don't think either of these are ideal outcomes.
"Buy-backs create an uncertain demand on our capital, potentially impacting our ability to invest in strategy and growth. Under the scenarios that we've modelled, buybacks could cost shareholders up to $1.2 billion over the next ten seasons," McBride says.
