Fonterra launched a campaign yesterday to deal with what has become its achilles heel: redemption risk.
Dairy farmers are required to buy shares in the dairy co-operative when they set up shop. When they sell, Fonterra has to pay them out. This is called redemption risk.
It's been well known that redemption risk represented the soft underbelly of the dairy giant, which is New Zealand's single biggest revenue earner.
But it was not until 2008, when drought, coupled with the effects of the global financial crisis, meant Fonterra had to write cheques out to the tune of around $600 million when farmers wanted out.
Having that kind of risk on its books has clouded Fonterra's development, which is why it came up with Trading Among Farmers (TAF), which is aimed at giving farmers the ability to trade shares among themselves, as well as giving private investors access to Fonterra's dividend flow.
TAF has met with some resistance from farmers who fear a loss of 100 per cent ownership and control.
Chairman Sir Henry van der Heyden said the scheme would strengthen the group by providing permanent capital while allowing some flexibility. "It will allow us to keep on executing our strategy, which is about maintaining our market position globally," he said.
Van der Heyden said redemption risk had always been part and parcel of Fonterra. "It got magnified through the global financial crisis in 2008," he said. "We almost had a perfect storm - we had the global financial crisis and then drought," he said. "Debt markets froze and [Fonterra] had to write a cheque for farmers in excess of $600 million."
"We always knew it was there, but that made it real," he said.
Fonterra will seek a mandate from the co-operative's 10,500 dairy farmers when they vote on TAF on June 25. If the scheme attracts just 50.1 per cent support, it will not go through and farmers will be left with the status quo, van der Heyden told a news conference. "I want a mandate that will unify the co-operative around this proposed evolution in our capital structure," he said.
Fonterra is targeting a $500 million fund, but its size will not be allowed to be larger than 20 per cent of all Fonterra shares on issue.
The fund is expected to be much lower - an actual size of between 7 per cent and 12 per cent. No farmer will be able to sell the benefits for any more than a third of their "wet shares", which are issued according to milk production volumes.
The chairman of the farmers' watchdog body, the Fonterra Shareholders' Council, Ian Brown, said farmers were taking a wait and see approach. "I wouldn't say there's a silent majority in support, but there is a silent majority of farmers who are waiting and watching carefully."
Last week, the previous council chairman Simon Couper resigned because he said he was not convinced farmers were sufficiently protected.
The first of two key resolutions for the meeting will require an ordinary 50 per cent majority to allow the Trading Among Farmers proposal to be implemented. The second resolution contains six separate changes to Fonterra's Constitution, and requires a 75 per cent shareholder majority.
A further hurdle is the passage of the Dairy Industry Restructuring Act Amendment Bill.