The aim is to protect farmers by giving them greater financial flexibility.
“The cooperative’s current structure was put in place when milk supply was growing rapidly in New Zealand. It now needs to be prepared for flat or potentially declining milk supply as a result of factors such as climate change impacts, regulatory changes, and alternative land uses,” Fonterra said.
The last capital restructure took place in 2012 and created “trading among farmers,” or TAF.
Under TAF, a fully-shared farmer has the option to sell the economic rights of those shares to the Fonterra Shareholders’ Fund.
The outside public can buy units in the fund but unitholders have no voting rights.
Fonterra will now hold a series of consultations with farmer shareholders, aiming to put the preferred option to a vote at the November annual general meeting.
To allow for “open conversations” the cooperative is temporarily capping the size of the Fonterra Shareholders’ Fund by suspending shares in the Fonterra Shareholders’ Market from being exchanged into units in the fund.
Chair Peter McBride said decisions – like temporarily capping the fund – haven’t been taken lightly.
“We appreciate they will have come as a surprise, but they are necessary to keep all our options open while the co-op’s farmer shareholders have a free and frank conversation about our capital structure,” he said.
The move, however, won’t impact trading.
Anyone holding units in the fund, which may include farmers, will be free to continue buying and selling units on the NZX or ASX, given the temporary cap only applies to the exchange of shares into units, Fonterra said.
The board has put forward a number of options, including buying back the fund.
Without the temporary cap, anyone holding “dry shares” – those shares held in excess of the “wet share” requirement linked to milk production – would have been able to exchange them into units in the fund during consultation.
“This could have more than doubled the size of the fund and made the option of buying it back unaffordable in the context of the cooperative’s current balance sheet targets,” Fonterra said.
Other options include dual share structures, which would move from the current single cooperative share to a compulsory supply share and a separate non-compulsory investment share; unshared supply structures; a traditional nominal share structure and a split cooperative model.
The board’s preferred option is a “reduced share standard with either no fund or a capped fund”.
“We believe the best option for our co-op is to move to a structure that reduces the number of shares a farmer would be required to have and, either removes the fund or caps it from growing further, to protect farmer ownership and control,” said McBride.
Under this option, the minimum requirement for farmer-owners would be one share for every four kilograms of milk solids supplied to the co-op, compared with the current requirement of one share for every kgMS supplied.
At the other end of the scale, farmers could hold shares up to a maximum of four times their milk supply.
This would make it easier for new farmers to join the coop and give more flexibility to existing farmers who may want to free up capital or who are working through succession.
“A key outcome of this change is that shares would be bought and sold between farmers in a farmer-only market,” it said.
Currently, declining milk volumes or more flexibility for farmers’ shareholding requirements could cause the fund size to grow significantly. That would mean the thresholds put in place to help protect farmer ownership and control could be exceeded within the next few seasons.
In order to stay within those thresholds, the cooperative would need to take action – such as buying back shares or units or increasing the thresholds to allow a greater degree of external investment.
“We don’t think either of these are ideal outcomes.
“Under the scenarios that we’ve modelled, buy-backs could cost shareholders up to $1.2 billion over the next 10 seasons.”
Once farmers have been consulted, the board will refine the preferred option or options and hold a second round of consultation.
Because some aspects of Fonterra’s current capital structure are reflected in the Dairy Industry Restructuring Act 2001, any vote is likely to be conditional on any necessary changes to legislation being passed.
McBride noted there is a “real sense of optimism” about the cooperative’s improving financial performance but “waiting for the problem to be at our feet will limit our options and likely increase the cost of addressing them, at the expense of future opportunities for us.” –BusinessDesk
