He was replying to matters raised by dairy farmers and commentators in the Fonterra in Focus series over the past month in The New Zealand Farmers Weekly.
The series reviewed Fonterra’s performance in the 30 months since Trading Among Farmers (TAF) was launched in November 2012.
Ups and downs in that performance were linked with the TAF structure but there was not cause and effect, Wilson said.
TAF, as a modified producer co-operative structure, had been a resounding success and had done what it was designed to do.
“You would hope so because we spent a long time designing it and analysing its possible defects,” Wilson, the directors’ representative on the TAF formation team, said.
The intentions were, in a nutshell, to provide existing farmers with more options, safeguard Fonterra’s capital from redemption risk and offer new entrants more flexibility in sharing up.
“TAF has functioned very well through droughts, two food safety scares and huge market volatility.”
Wilson did not agree TAF had led to more farmer disengagement or disloyalty.
“Farmers have always been able to enter or leave the co-operative under the principles of fair entry and exit and the greater numbers who left did so before TAF was introduced, not since.”
Wilson said the liquidity in the market for supply shares and Fonterra Shareholders Fund (FSF) investment had not resulted in the low share and unit prices recently.
It was the performance of Fonterra and market prospects that drove the share/unit prices, not an imbalance of farmer or investor activities.
At the time of the commodities crash that accompanied the global financial crisis, the independent valuer thought Fonterra shares were worth $4.52 (pre-TAF) and it was not surprising the market prices had approached that level again when world dairy prices were so low.
“TAF has functioned very well through droughts, two food safety scares and huge market volatility.”
John Wilson
Fonterra
“All share markets move beyond what we might think were rational points from time to time but this market has got liquidity and depth, which is what we need.”
Some farmers who left Fonterra had used the FCG market and others had converted dry shares to wet to meet their obligations.
“The market is functioning well and providing good price discovery.”
Aaron Jenkins, one of the TAF designers, who became Fonterra’s first general manager of TAF, said the high turnover of FSF units since listing was not a case of the tail wagging the dog.
An overwhelming majority of supply shares (FCG) were wet shares that couldn’t be traded because they were needed for a share backing of milk production.
Jenkins, now markets head for NZX, the listed markets operator that also owns NZX Agri, publisher of Farmers Weekly, also reminded farmers of two TAF fundamentals: it would not be used to raise capital externally and it was not a first step towards splitting Fonterra in two.
“TAF doesn’t make it any easier to split Fonterra – if that was your objective then you wouldn’t start with TAF.”
Wilson said TAF had provided a far stronger co-operative in its quest to vertically integrate the NZ dairy industry, an objective identified long before Fonterra was formed.
The co-operative structure would continue to evolve to meet that strategy.
Now capital was not constrained as Fonterra executed the strategy, he said.
Jenkins pointed out that raising $2.4 billion for capital expenditure would have been much harder without TAF when Fonterra was exposed to redemption risk, had many competitors for milk supply and when milk prices were low.
Wilson added that permanent capital and the strong balance sheet now offered many other ways to raise more capital and make long-term company commitments like joint ventures when needed to execute strategy.
He was asked why Fonterra heavily emphasised “global relevance”, a term some farmers feared was a distraction in tough times.
Wilson said it was a term to cover engagement around the world with customers, consumers and producers in overseas milk pools.
“For a long time we have taken milk from Australia, Chile, China, Europe and the United States, either directly or through partnerships.
“Global relevance is not shorthand for doing new things but doing existing things better.
“It’s about accessing those milk pools, producing the right things and bringing the profits back to NZ farmers and investors.”
Wilson also answered criticism that Australian suppliers got $6/kg plus last season (2014-15) while NZ suppliers were on track for $4.50/kg plus a 20-30c dividend.
“When I was in Australia or Chile the year before, I was being criticised because NZ farmers were getting more than them.
“Now that situation has reversed and because they are markets with significant domestic volumes when global markets drop dramatically it takes longer for the domestic milk price to come down.”
Wilson said the long-term, loyal shareholders were due more flexibility under TAF as many of the initiatives thus far had been more use to new shareholders.
Those loyalty options would be grouped under the Farm Source banner, launched last September.
