Fonterra is in the middle of a big restructure of its capital. It is still the case given its dominance over us that where Milk Supertanker Fonterra goes, we go.
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Source: (Photo / File)

The Fonterra Annual General Meeting on Thursday has a fair bit riding on it, and the Minister of Agriculture Damien O’Connor and MPI know it.
(I’m only focusing on share ownership in this piece, not the economic and social and environmental footprint of Fonterra. For those who wish to chew over their broader strategy, it is here.

When Fonterra was legislated into existence 20 years ago, it took the simple and pragmatic approach of adopting the capital structure format used by its predecessors; farmer shareholders had to own one share for every kilo of milk solids they supplied.

If you wanted to supply Fonterra you had to buy shares from Fonterra, and if you chose to exit Fonterra would buy those shares back.

But what occurred was a tsunami of cash that pushed in and rolled out pretty fast.

The mass-irrigation boom happened particularly in Canterbury and Otago and since most of these new conversion farms had no choice but to supply Fonterra, way more shares were being bought than sold.

But then competitor businesses started up there and the milk price crashed in 2006-07, and each mid-Canterbury dairy farmer with an average 300,000 shares that walked off to the competitors was costing Fonterra an average of $1.35m in share redemptions each.

That made for massive instability on Fonterra to invest, which was also more broadly doing badly every way you looked at it.

So this is another major go at stabilising itself financially, after selling off nearly everything that stood up since 2018. The Chief Miles Hurrell is most certainly working to a long term plan.

The consultation with the farmer owners has been extensive this time around, which is positive.

For those interested in the detail of what is proposed here’s a quick summary.

Retaining local control of a much smaller but much more profitable Fonterra is very important to us all.

Fonterra itself says “We see total New Zealand milk supply as likely to decline, or 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. Protecting a strong New Zealand farmer-owned Co-operative of scale is in all of New Zealand’s interests.”

Right now these moves feel optimistic: the milk solid price per kilo is heading for $9.00 and will sustain a South Island + Waikato + Taranaki boom through 2022. But we’re not in an agricultural stress test like we were a decade ago, which is where these capital-defensive proposals really matter.

The democratic thresholds to changing Fonterra’s capital structure are high: for the proposal to be approved, it would require 50% support from the Co-operative Council (which is made up of representatives elected by farmers), followed by 75% support from eligible farmers at this week’s AGM.

Fonterra’s voting thresholds, and its consultation requirements, are higher than anything our Parliament does. Given the impact on New Zealand as a whole, it is an important set of votes to watch.

Fonterra are pretty confident in the result coming up.

The interesting staging of this vote now means that the policy and political debate about its impact on Fonterra and the Dairy Industry Reform Act will play out in the first half of 2022.

Fonterra are aiming to have this all tidied up by June 1 2022. Not gunna.

In the note Fonterra put out yesterday, they are clear that “Government is not in a position to support DIRA changes to facilitate the proposal at this stage, but understands the Government was to work together to reach an outcome that works for both parties. Fonterra is confident there is a regulatory framework that would support the Flexible Shareholding structure.”

It’s smart politics for the Minister to first let Fonterra gain its owner shareholder mandate, before he steps in with a view on it in terms of the legislation. That stops the mess the last time Fonterra tried this in 2012. It’s also showing the government to have a more active role in Fonterra than before. Vital.

The likelihood that in the next 6 months this share ownership debate will spill over into the water reforms and the RMA reforms is high. Whether or not that’s pertinent to who owns what shares in Fonterra, more permanent policy scrutiny of Fonterra will pull the NZ politics of Fonterra more out into the open.

Sees higher demand as more states embrace low carbon fuel standard programs. Expects positive impact from higher cellulosic RVO in 2022 RFS

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