Federated Farmers says Fonterra is moving in the right direction by reconsidering the dairy giant's capital structure as its milk supply starts to tail off.
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SUPPLIED Fonterra is considering a radical revamp of its capital structure which would keep farmers in control.

Fonterra investors and farmers are digesting some radical ideas put forward on Thursday to reshape the co-operative’s capital structure.

Chairman Peter McBride said the review had tried to strike a balance between the need for flexibility in terms of farmer equity, control over its milk supply and the price of entry for new farmers.

”We have a choice to make, we either deal with this issue now or we pay for it later,” he said.

Federated Farmers dairy industry group chair Wayne Langford said it was “the beginning of a fairly long and extensive review” for Fonterra owners.

But it was good to see the company front-footing issues like milk supply and ownership, “as well future farm succession and young farmers coming into the co-op”.

Troubled by forecasts of a stagnant or falling milk supply, the board’s preferred option is either to buy back and close, or cap, the NZX-listed Shareholder Fund.

Fonterra is totally owned by its farmer suppliers, but in response to a growing need for outside capital, it allowed non-farmers to invest in 2012 by listing units on the NZX.

However, the unit price influences the value of the farmer shares, which are traded in a separate farmers-only market.

The size of the shareholder fund is also a concern for Fonterra and McBride says closing or capping the shareholders fund would keep the balance of power in farmers’ favour.

It would also ensure the share price was pegged to farmer values, which could make it cheaper for new generations wanting to get into dairying.

At the moment, the shareholder fund only holds about 6.5 per cent of the company’s total shares, albeit without voting or ownership rights.

However, should the fund cross its 20 per cent threshold, buying back the fund would be prohibitive for farmers.

The other part of the Fonterra board’s proposal revolves around reducing the number of shares farmers need to be a supplier.

Farmers own a mix of production-related “wet” shares and unrelated “dry” shares, and can convert their dry shares to units on the sharemarket.

But the total number of dry shares in the company is rapidly approaching its limit. Fonterra has temporarily suspended that conversion facility while consultation is underway.

McBride said that if the fund was allowed to grow, “clearly from our perspective that would put farmer ownership and control at risk … It’s a slippery slope to corporatisation”.

Despite healthy milk prices in recent months a global glut of milk has taken the edge off the drive to grow New Zealand’s milk supply.

Marc Rivers, Fonterra’s chief financial officer, told a media briefing that going forward, Fonterra would be more “capital light,” moving from debt-funded growth to a conservative balance sheet.

“It’s quite a change from the [operation] before but now we’ve set that strategy – and I think the results we’ve seen over the past wee while have demonstrated that we are on the right path – now the time is right to look at the structure.”

Under the preferred option, farmer owners would only have to hold a minimum of one share for every four kilogram of milk solids supplied to the co-op, compared with the current requirement of one share for every kgMS supplied.

At the other end of the scale, farmers could hold shares up to a maximum of four times their milk supply.

“This would make it easier for new farmers to join the co-op and give more flexibility to existing farmers who may want to free up capital or who are working through succession,’’ McBride said.

While Fonterra’s concern was chiefly around performance, McBride said the review on capital was also mindful of rising environmental concerns around dairying.

“Our greatest competition is land use change. In some cases … to meet some of the environmental compliance standards that they may have to meet will require more capital, and giving them some flexibility may mean they carry on for longer.”

Any proposal needs 75 per cent shareholder approval and a vote was likely at the company’s November annual meeting.

Given the dizzying array of options in the dairy aisle of the grocery store these days, some may think that the last thing we need is another type of milk. Yogurt maker Danone disagrees.

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