By locking in a stable capital base it’s created a key stepping stone and a step change in the co-op’s ability to drive another whole level of performance.
“As a board we can really empower management to execute the strategy now because we have that certainty of permanent capital and that’s where the rubber really hits the road,” he said.
He’s more than delighted with how TAF has worked in its first year; how well the two parallel markets are working – the Fonterra Shareholders’ Fund and the Fonterra Shareholders’ Market – and the ability it’s created for the board to look after its farmer members.
“TAF’s given us a whole lot of things we didn’t have before because we’ve now got the stability in the balance sheet to do them.”
They included the bonus share issue of 1:40 shares in April that equated to a benefit of about 17c/kg milksolids (MS).
It also enabled the supply offer allowing farmers to sell up to 25% of the beneficial rights to wet shares.
Priced at $7.92/share it was so popular a fifth of the co-op’s farmers took it up and the offer had to be scaled back so farmers could sell 80% of what they’d applied for.
“We’ve also got much more flexibility now for farmers growing production or new farmers with agreements that can allow them a six-year-in pathway for sharing up,” Wilson said.
“And I’m very sure you’ll see our management coming out with more options over the next 12 months to increase flexibility further so we’re providing solutions for farmers.”
But one of the biggest benefits of having secure capital came to light at the outset of this season when the advance was set at $5/kg MS for June and July, quickly stepping up to $5.50/kg MS paid in September.
“Thanks to our stable balance sheet Fonterra was able to go outside its normal policy and bring forward the advance rate to our farmers and pay out an extra, more than $500m.”
The board had done that to ease the cash flow pain its farmer shareholders were feeling following the drought.
It was a move in complete contrast to what could have happened in a pre-TAF environment when, if faced with a similar drought the co-op could have experienced a redemption loss in capital of more than $200m.
By increasing the early season advance Fonterra had reported a year-end cash flow position of $109m when it could have been $688m, and had reported gearing of 39.6% when it could have been 4% below that.
“On top of all that the market is working and don’t underestimate the importance of that,” Wilson said
Liquidity had exceeded expectations, meaning a farmer could go to the market and confidently know they could buy or sell shares.
“The markets are giving farmers all the flexibility we were looking for.”
