Fonterra has opened wide the door to new farmer shareholders to stem the flow of milk supply to competing processors.
It says the new proposed capital structure will strengthen the co-operative and offer financial sustainability, while staying put could lead to stranded assets, lower milk prices and continued loss of market share.
Chair Peter McBride says capital structure and company strategy are intertwined and the proposed changes are a critical decision not taken lightly.
Fonterra intends to put the revised capital structure proposal to shareholders at the December annual meeting.
McBride believes the logic of the proposal and the amendments made during 12 months of drafting and farmer consultation will deliver the needed 75% approval for the constitutional changes.
A leading reason for farmers leaving the co-operative is the high level of compulsory investment.
“Flexible shareholding would help level the playing field with competitors, many of whom are foreign backed and don’t require farmers to invest capital,” McBride said.
The new flexible shareholding structure would set a minimum share requirement of 33% of milk supply and six years to reach that level.
More types of farmers could buy in – up to 4000 sharemilkers, contract milkers and farm lessors.
Existing shareholders who wish to sell would initially have up to 15 seasons to exit, reducing annually to 10 seasons, to support liquidity and give farmers greater choice to remain involved.
That also applies to farms that are switching supply to another processor.
The Fonterra Shareholders’ Fund, presently 6.7% of share ownership and with $420 million market capitalisation, would be capped to protect farmer ownership and control of the co-operative.
Supply shares would be bought and sold in the existing NZX-operated market between farmers only, with some funds set aside to help make market liquidity.
The maximum shareholding is four times milk supply, a doubling of the current requirement.
Fonterra thinks this will help strike the balance between liquidity in the market and avoiding significant concentration of ownership.
“We see total NZ milk supply as likely to decline, and flat at best,” he said.
Farmland is now leaving dairying rather than being converted into dairy.
“Our share of that decline depends on the actions we take with our capital structure, performance, productivity and sustainability,” he said.
“If we do nothing, we are likely to see around 12-20% decline by 2030 based on the scenarios we have modelled.”
Success in the future means a sustainable milk supply in an increasingly competitive environment, environmental pressures, new regulations and changing land use.
McBride argued that farmer owners staying stronger together in the co-operative was in everybody’s interests.
“From what is now a position of financial strength we can communicate our intentions and ensure that we can deliver,” he said.
The modelling has led to likely consequences of failing to act, and these are not published to scare farmers into supporting the proposal.
“Our farmgate milk price could be 6c to 13c lower by 2030 if we make no changes to capital structure and continue to lose market share at the rate of the past five seasons,” he said.
