KEY POINTS:
The plethora of political issues swirling at last week's Dairy Farmers of New Zealand conference highlighted PR problems faced by Fonterra and a range of intra-industry tensions.
How those challenges and tensions are managed will impact significantly on bottom line matters, such as payout and farmers' willingness to contemplate changes to Fonterra's capital structure, including a possible full or partial share listing.
The PR challenges include some poor farmer perceptions about co-op communications.
An example was a complaint from DFNZ vice-chairman Lachlan McKenzie about Fonterra's use of a PR firm to do a "fluff over" during the release of information.
"We are sick of being manipulated and patronised."
On the feeling the co-op was sometimes not giving straight answers to farmers, he said: "I don't want that feeling to keep bubbling through our shareholders."
A number of delegates also spoke of their unease at feeling as though they wouldn't get the right information from Fonterra unless they asked exactly the right questions.
Finding a way to address that unease will be crucial in upholding the credibility of the board and management during the debate about capital structure.
Also, the conference broadside fired at the idea of listing by former Canterbury University academic Alan Robb highlighted the dangers of Fonterra not having a more proactive media and public relations strategy around the capital structure review.
Robb's warnings about potential pressure to list from self-interested financial "predators", and of farmers ending up losing control of the co-op after a float, probably echo some of the fears of many farmers.
The views of Robb, and other commentators, are taking part in a comparative vacuum. It would seem smarter for Fonterra to be more active in helping frame the public discussion from the start by, for example, issuing a discussion paper on various ideas about co-operative capital structure.
If it doesn't, it risks the information void being filled by others, with their ideas helping to entrench opinions before formal options have even started to peek above the proverbial parapet.
DFNZ has been encouraging Fonterra to provide more information to farmers about the mechanisms and implications of capital restructuring.
A conference report said the co-op had responded favourably to this request and it was expected the information flow would improve.
Fonterra must ensure this flow doesn't turn out to be an ineffectual drip.
Unmet aspirations
A key issue driving the review of Fonterra's capital structure is said to be the threat of farmers pulling capital out when they leave the co-op.
Having to sell some or all shares on the market could lessen this "redemption risk".
One idea is to list the value-add part of the business related to returns from areas such as branded consumer products. There has been widespread dissatisfaction at the level of these returns - improving them was one of the reasons for the merger which formed Fonterra in the first place.
Outgoing Fonterra Shareholders' Council chairman John Monaghan said the value-added return benefits of the merger had been "over-sold".
He noted the co-op's chief executive, Andrew Ferrier, had an "aspirational target" of squeezing value-added returns of 50c/kg of milk solids from the ingredients business and 50c/kg from branded goods.
That compares with a target of 45c/kg this season, itself an 80 per cent lift on last year's performance.
Ironically, chairman Henry van der Heyden has said the redemption risk could be heightened if Fonterra continues to improve the value-added performance, given that the share price is directly related to these earnings.
It's another example of the wheels within wheels of what is a complex business.
DFNZ chairman Frank Brenmuhl noted incoming shareholders' council chairman Blue Read had had a rocky relationship with van der Heyden in the past. Whether that dynamic puts any spokes in the wheels of dealings between the council and the co-op remains to be seen.
Insight insights
Tension between Monaghan and Dairy InSight chairman Doug Leeder also bubbled away at the conference.
Dairy InSight is the organisation which receives and allocates $27 million in farmer levies for "industry-good" R&D.
Last year, the shareholders' council ruffled Leeder's feathers by announcing a review of this R&D without consulting Dairy InSight beforehand, even though it was discussed with dairy companies.
The review followed the industry's "failure" to achieve targeted productivity gains of 4 per cent a year.
Leeder said a review done for Dairy InSight by the NZ Institute of Economic Research had now questioned the logic behind the 4 per cent target. Profitability was excluded from the calculation. If profit is the primary goal of farming, the current productivity calculation is not a good measure of industry success, he said.
And another independent analysis by an agribusiness specialist showed farmers were getting a return of more than $7 for every $1 of levy money spent.
Leeder, who has stressed the review must focus on the best interests of farmers rather than dairy companies, said: "Unfortunately, this review ... has the potential to be about control."
Noting there were suggestions that dairy companies should manage "industry-good" activities, Leeder said: "Farmers' money should not be controlled by anyone other than farmers."
At present farmer-controlled Dexcel provides much of the research funded by Dairy InSight and Leeder proposed investigating having a single farmer-elected industry-good organisation.
In the wind
Temperatures were also raised over the touchy issue of the agricultural sector's greenhouse gas emissions.
About half New Zealand's emissions come from agriculture in the form of methane from livestock and nitrous oxide from animal waste and fertiliser use.
The Government's Sustainable Land Management and Climate Change document says the Government is looking for measures that will help the sector cut emissions and prepare it for a cost on emissions after 2012.
At the moment the focus is on options to reduce nitrous oxide emissions, as practical and cost-effective ways of cutting methane are not available.
DFNZ's Brenmuhl claimed the Government's proposals were based on political, not scientific, considerations.
"Farmers make up approximately 4 per cent of voters and are being asked to shoulder a disproportionate burden, while the majority rest easy" so the New Zealand Government can declare victory over climate change.
