"> 'Ludicrous' that Fonterra is still bound by legislation that tilts playing field towards its competitors - eDairyNews-EN
With the prospect of this season's farm-gate milk price looking closer to $9 than $8 and a significantly better than expected free-trade deal with the UK, economically things are looking rosy for Fonterra farmers. I'm a strong supporter of the co-op and was intrigued when it announced it was looking to change its capital structure to make it easier for farmers to join.
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DOMINICO ZAPATA/STUFF The fact that a company could take a democratic shareholder vote and the decision whether to enact the outcome is left to the Government is ludicrous, writes Craig Hickman. (File photo)

With the prospect of this season’s farm-gate milk price looking closer to $9 than $8 and a significantly better than expected free-trade deal with the UK, economically things are looking rosy for Fonterra farmers. I’m a strong supporter of the co-op and was intrigued when it announced it was looking to change its capital structure to make it easier for farmers to join.

The new proposed capital structure put forward by Fonterra’s board would make joining the co-operative easier by reducing the high capital investment required to supply it and allow farmers greater financial flexibility when they decide to leave.

Fonterra last changed its capital structure when it adopted Trading Among Farmers (TAF) in 2012. TAF was a response to the issue of farmers exiting Fonterra and redeeming their shares, meaning large sums of money were washing in and out of the co-op, mainly out.

It addressed one issue, the threat to Fonterra’s balance sheet, but ignored systemic problems like the high cost of becoming a Fonterra supplier and the fact suppliers were still leaving the co-op in favour of independent processors who don’t require farmer investment.

TAF was based on the belief milk supply would continue to grow and Fonterra’s share of that supply would remain stable. In fact, milk supply levelled off shortly after the introduction of TAF and Fonterra’s share of the milk pool fell from 96 per cent to its current level of around 80 per cent.

The Minister of Agriculture Damien O’Connor, who has been an outspoken critic of TAF since it was introduced, welcomed the news of an impending change. In May this year he said he would assist Fonterra’s board in speeding through the necessary law changes, seeing the need to quickly amend the legislation that controls Fonterra, once final decisions were made.

With Fonterra’s board actively consulting farmers and amending their proposal based on the feedback received, and the Minister of Agriculture enthusiastically supporting change, all that would be needed to see the changes put in place is a favourable farmer vote in December.

Or so you would think. A recent email from Fonterra Board Chair Peter McBride poured cold water on that notion.

The new proposed capital structure put forward by Fonterra’s board would make joining the co-operative easier by reducing the high capital investment required to supply them and allow farmers greater flexibility when they decide to leave. (File photo)
DOMINICO ZAPATA/STUFF The new proposed capital structure put forward by Fonterra’s board would make joining the co-operative easier by reducing the high capital investment required to supply them and allow farmers greater flexibility when they decide to leave. (File photo)

The email, which was announcing the board’s intention to go ahead with the vote, contained a chilling paragraph towards the end which read: “At this stage, the Government is not in a position to support DIRA changes to facilitate our proposal, but we understand the Government wants to work with us to reach an outcome that works for both parties.”

The news that O’Connor is no longer willing to amend the legislation is an obvious sign that something has gone seriously awry behind the scenes.

We can expect Fonterra’s competitors will be lobbying hard for the status quo as any changes that would make it easier for farmers to join Fonterra poses a risk to their supplier base, a base they would move mountains to protect.

Another possibility is that the Government departments reviewing the proposed changes simply don’t like what they’re seeing, and if that’s the case it explains O’Connor’s sudden reticence. It would be a brave minister indeed who went against the advice of his ministry without very strong justification.

McBride’s email also held out hope the changes would be in place before the start of the next milking season starting in June.

The news that Minister of Agriculture Damien O’Connor is no longer willing to amend the legislation is an obvious sign that something has gone seriously awry behind the scenes. (File photo)
ROBERT KITCHIN/STUFF The news that Minister of Agriculture Damien O’Connor is no longer willing to amend the legislation is an obvious sign that something has gone seriously awry behind the scenes. (File photo)

Given that the changes are obviously not a Government priority, there’s no legislation prepared, not to mention the looming long Parliamentary Christmas break, I’d say that’s a very faint hope indeed. I also hope O’Connor’s time is focused on delivering farmers and growers a decent trade deal with Europe.

In the worst-case scenario, Fonterra and the Government are so far apart that the changes farmer shareholders will vote on in December will look nothing like what the Government is willing to implement. If so, this may end up being an opportunity wasted and the significant share value farmers have invested in the co-op will have been decimated for no reason. For the sake of farmers, I sincerely hope this isn’t the case.

The whole saga however highlights a very important truth, after 20 years in existence Fonterra is still bound by legislation that tilts the playing field heavily towards its competitors. The fact that a company could take a democratic shareholder vote and the decision whether to enact the outcome is left to the Government is ludicrous.

DIRA needs to be scrapped, except for the milk price manual, and Fonterra and its farmer shareholder need to be free to chart their own course.

With the next DIRA review only a couple of years away, that’s where the co-op’s lobbying muscle (and the Government department’s time) should be directed instead of attempting to tinker around the edges. Only then will decisions about the co-op’s structure solely be in the hands of farmers.

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