Home' NZ Dairy Farmer : October 2009 Contents IT certainly has been a hectic and
rewarding time for Fonterra sharehold-
ers. Hard on the heels of the capital
restructuring proposal came a revised
payout prediction of $5.20kg/MS which
will prove a lifeline to many farmers.
This was followed with a profit
announcement that signalled a strong rise
in distributable profit which meant a high-
er value return payment for farmers.
Amendments to the pricing formula for
regulated milk were also announced to
take effect in the 2010/11 season. The
new formula will price milk at the farm-
gate price plus $10kg/Mg removing the
ability of independent processors to
access milk at a lower price than Fonterra
paid its farmers.
The revised payout prediction would
have come as a surprise to most and will
likely have a marked effect on the success
or otherwise of Fonterra’s proposed capi-
After abandoning its plans for a public
share listing in the face of farmer opposi-
tion, Fonterra is looking to encourage
these shareholders to increase, or at least
maintain, their equity in the co-operative.
Chairman Sir Henry van der Heyden
said the new approach, if implemented,
should provide sufficient equity to fund
Fonterra’s strategy for at least the next
Although Fonterra was reducing its
debt, it was still carrying too much, share-
holders were told on Friday. The situation
had been made worse by the global finan-
cial crisis and both the board and the
shareholders’ council wanted to address
the issue right now.
Redemption risk also featured in the
strategy. Fonterra paid out $742 million in
redemptions following the 2007/08
drought. The co-operative said it risked
too much if that happened again “and with
our capital structure, it could”.
In the current season, it risked losing
more equity as farmer shareholders
dropped production in response to current
Instead of public listing, Fonterra was
proposing a co-operative based three-step
solution based on farmer shareholders
retaining 100 per cent control and owner-
The new capital structure review aimed
to stop large amounts of money “washing
in and out” of Fonterra’s balance sheet as
milk production fluctuated.
The first step would be to let sharehold-
ers hold shares up to 120 per cent of
recent or expected production (as opposed
to the current 100 per cent) and in return
the value return (profit) would be paid on
all shares held in a season.
This would mean Fonterra got more
equity and farmers were also rewarded.
All share transactions during end of sea-
son would take place at the new season’s
price to achieve an even playing field for
farmers buying or redeeming shares.
These extra shares would be known as
dry shares and would not carry any voting
rights with voting remaining linked to
milk supply. To provide a financial incen-
tive to hold these dry shares the value
return would be paid on all and all trans-
actions at end of season would be at the
new season’s price.
Shareholders were told by buying dry
shares they would be strengthening their
co-operative but the board acknowledged
cash was tight, so not all farmers would be
able to take up the option at this time.
The scheme was also aimed at stopping
farmers surrendering shares at the higher
previous season’s price when the share
The board said it would want to avoid
any farmers purchasing dry shares, hold-
ing them for just a few months and
redeeming them at season’s end just to
receive the full season’s dividend pay-
ments. A way to prevent this would be to
require any new shares issued this mid-
season to be held until the end of May
Looking further ahead, farmer share-
holders would have “plenty” of choice to
consider how to raise additional funds for
growth. One possibility would be to
increase the number of dry shares and
retiring farmers could be allowed to hold
on to these.
Another possibility floated was
Fonterra being allowed to place a small
number of non-voting shares with a limit-
ed number of selected New Zealand pen-
sion funds as a long term investment.
Further down the line, Sir Henry said,
trading of shares among farmers could be
considered and voted on next year with
implementation possibly in 2011. Trading
would be via an exchange which may or
may not be operated independently of the
The second proposed step was to
change the fair value share valuation
approach so it was based on the fact the
market was restricted (as only farmers
could own shares).
The suggestion was to hold the level at
$4.52 until the valuation based on a
restricted market caught up.
Shareholders will be consulted on the
first steps over the coming weeks. If feed-
back is positive proposals will be finalised
for the annual meeting in November.
The Dairyman OCTOBER 2009 5
Fonterra weighs up its options
By Jeff Smith
New Zealand owned and operated since 1915.
- Nutritech Silage Inoculant
Customer service 0800 736 339
Available in granular
and water soluble for mulations.
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