Independent economist Shamubeel Eaqub has stood by his comment calling Fonterra “scum” over its treatment of equity investors, saying they had been treated with contempt and ignored by the co-operative’s board.
The decision to offer farmer-shareholders interest-free loans to help them through the low payout forecast this season was effectively giving equity investors a zero return.
Eaqub’s claims highlighted the potential conflict when co-operatives sourced outside investment but then had to satisfy both its shareholder suppliers and outside investors.
It was a prospective clash that was raised when Fonterra adopted trading among farmers (TAF).
Fonterra chief financial officer Lukas Paravicini said both groups of shareholders wanted the same thing – a high milk price and a high return on their investment.
“We look at them as one.”
Eaqub’s criticism of Fonterra offering shareholding suppliers an interest-free loan had not provoked a response from unit holders.
“We are a co-operative and we stand by our owners and unit holder investors understand that,” Paravicini said.
“They want Fonterra to be a strong co-operative so we can deliver on our strategy.”
Both groups of shareholders wanted Fonterra to advance its strategy of growing earnings from ingredients and downstream consumer food service.
“It is no different to the discussion we have with our farmer-shareholders.”
Unit holders provided Fonterra with equity but also extra rigour and scrutiny of its plans and strategies.
Co-operative Business NZ chairman Jonathan Lee said tension could arise because co-ops tended to take a longer-term view than non-farming investors.
That longer-term view ultimately helped unit holders by creating stronger a business and supply channel.
Investors should understand the co-operative model and not simply apply an investor’s perspective across the business, Lee said.
Eaqub said Fonterra’s treatment of unit holders raised a wider issue of governance, strategy and execution.
He acknowledged satisfying contrasting investor motives was not easy but the lesson for co-operatives looking to adopt a hybrid ownership model was to have correct governance and for all investors to be represented at the board table.
“If you are going to have investors they have got to be represented and have a voice at the top table.”
Fonterra did not make any reference to its unit holders in its announcement of the forecast milk price for this season and had also failed to execute more aggressively its value-added strategy.
“It takes money but what did they do during the very good times we have had?”
Waikato University economics Professor Jacqueline Rowarth said Eaqub was correct to highlight the conflict of interest.
Rowarth was surprised meat co-operative Silver Fern Farms and Australian dairy co-operative Murray Goulburn were both pursuing similar hybrid models.
She wanted Fonterra to follow an investment policy that focused on the needs of the co-operative’s shareholders and that meant moving away from commodities.
Money should be invested in research and development in, among other things, increase the shelf life of milk so it could be exported as long-life milk to water-short countries.
