Fonterra to simplify capital structure

Fonterra is set to make a historic break with its past by seeking milk from dairy farmers without requiring them to buy shares in the co-operative.

In a media briefing in Auckland, chairman Henry van der Heyden and business economics director Alex Duncan said the company wanted to source up to 10 per cent of milk supply under contract arrangements.

That level would be reached gradually, starting with up to 3 per cent in the 2006-2007 season.

Going on last year's figures, 10 per cent would be 120 million kg of milk worth $400 million to $450 million at the farm gate.

The plan is one of a bundle of changes proposed after a lengthy board review of the contentious topic of Fonterra's capital structure.

The company describes its approach as "evolutionary rather than revolutionary".

The other proposals include:

* Throwing more light on the performance of the consumer brands business, NZ Milk, with separate audited financial statements.

* Eliminating "peak notes" - a device where some farmers pay money to Fonterra for supplying milk at peak times, requiring extra processing capacity.

* Eliminating "supply redemption rights", a device for adjusting for seasonal fluctuations in supply.

The company wants to replace the latter two with simpler methods.

Van der Heyden said the proposals were presented to 3000 shareholder farmers at about 75 meetings.

Duncan said feedback had been "relatively supportive".

The company plans to come up with a final proposal early next year to be put to a special meeting of farmer shareholders.

In the briefing documents for farmers and the media, Fonterra says it aims to achieve:

* Greater transparency around the separate contributions made to farmers' payouts by milk prices and the company's "value-added" activities.

* Greater flexibility and choice for farmers to supply milk they might not otherwise supply to Fonterra.

* A simple capital structure that ensures continued farmer control.