Fonterra’s Board has presented a revised capital structure proposal that it will discuss with farmers over the coming weeks before deciding whether to proceed to a shareholder vote.
The “Flexible Shareholding” structure is a progression on the preferred option put forward at the start of the consultation process in May, but with key changes based on farmer feedback and further expert advice:
Fonterra Chairman Peter McBride says changing the Co-operative’s capital structure is a critical decision and not something the Board and senior management are taking lightly.
“We are confident that this proposal would support the sustainable supply of New Zealand milk that our long-term strategy relies on. One enables the other, and together they give our Co-operative the potential to deliver the competitive returns that will continue to support our families’ livelihoods from this generation to the next.
“Our future success relies on our ability to maintain a sustainable milk supply in an increasingly competitive environment, and one that is rapidly changing due to factors such as environmental pressures, new regulations and alternative land uses.
“We see total New Zealand milk supply as likely to decline, and flat at best. Our share of that decline depends on the actions we take with our capital structure, performance, productivity and sustainability. If we do nothing, we are likely to see around 12-20% decline by 2030 based on the scenarios we have modelled.
“Farmers leave the Co-operative for different reasons, but one of the most influential ones is the high level of compulsory investment that’s required to be part of our Co-operative. A capital structure with Flexible Shareholding would help to level the playing field with competitors, many of whom are foreign-backed and don’t require farmers to invest capital.
McBride says the Co-operative's farmer owners staying stronger together is in everybody’s interests.
“Analysis of potential milk supply scenarios we have developed shows that, based on our current operations, our Farmgate Milk Price could be 6-13 cents lower by 2030 if we make no changes to our capital structure and continue to lose market share at the rate we’ve seen over the past five seasons to May 2020.”
Fonterra’s Farmgate Milk Price sets a benchmark in New Zealand, so even farmers who don’t supply the Co-operative benefit from it. For the 2020/21 season, Fonterra delivered $11.6 billion to the New Zealand economy through the final cash payout to farmers.
Under the Flexible Shareholding structure, farmer ownership and control would be protected by capping the Fund. This means shares in the farmer-only FSM would no longer be able to be exchanged into units.
The proposed changes would also protect against the uncertain and recurring risk to the Co-operative’s balance sheet that would come with having to buy back shares or units to stay within thresholds related to the Fund size if milk supply declined under the current structure. Those thresholds exist to protect farmers’ ownership and control of Fonterra.
Flexible Shareholding is detailed in a booklet that has been sent to all farmer owners, who will have a chance to discuss it further with Directors and senior management at upcoming meetings and webinars.
At this stage, the Co-operative is still aiming for a farmer vote at its Annual Meeting in December.
Before a vote could take place, at least 50% of Fonterra Co-operative Council members would need to support the final proposed changes. Ahead of a vote, voting documents would provide farmers with everything they need to know to assess the proposed changes they would be voting on. The approval of 75% of votes from voting farmers would then be required.
As some aspects of Fonterra’s current capital structure are reflected in the Dairy Industry Restructuring Act 2001 (DIRA), any vote would be conditional on the necessary changes to legislation being passed.
Fonterra says it is continuing to consider unit holders’ interests throughout this process and is consulting with the management company of the Fund, which communicates with unit holders directly.
Further information, including the Farmer Booklet and Presentation, is available at www.fonterra.com/capitalstructure
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