Fonterra still needs to face big questions

Fonterra's capital restructure proposal will buy it another three or four years of farmer-only funding then it will need outside equity, says a rural leader who represents the voice of 40 per cent of the New Zealand dairy industry, sharemilkers.

Federated Farmers' sharemilkers' section chairman Jeff Bolstad said the restructure package announced on Friday does not answer the "real question" facing Fonterra. "We can fund New Zealand [business] as we've always done from New Zealand, there's no question. More retentions [from payout] will be the next step. But if Fonterra is going to play with the Nestle's and Kraft's of this world it's going to need outside capital."

New Zealand is thought to have around 4000 sharemilkers. Last year their herds produced 40 per cent of the nearly 14 billion litres of milk Fonterra collected. Many sharemilkers also own farms and most have an eye to farm ownership, making them the future of the $20 billion dairy industry.

Fonterra, which controls more than 90 per cent of the country's raw milk supply needs more capital to address the risk to its balance sheet of its farmers cashing in their redeemable shares, and to fund global and domestic growth ambitions.

Last week it announced a plan to rejig its capital structure. In recognition of farmer-shareholder determination to retain 100 per cent control and ownership, the three-step proposal offers no prospect of a market listing of shares, though it suggests a move at step three to share trading among farmers. Bolstad said the question of whether sharemilkers were as energised as farm owners about retaining 100 per cent control had not been canvassed.

Step one invites Fonterra suppliers to buy an extra 20 per cent of shares, and step two proposes getting all Fonterra shares independently valued to reflect their restricted trading status. Fonterra shares, known as "fair value" shares, are market valued though they are not market traded.

At present farmers must buy a share for every kilogram of milksolids they provide the co-operative, New Zealand's largest company. They usually buy shares for 100 per cent of their production. The extra 20 per cent of shares would be known as "dry" shares and would attract a value-add return but would have no voting rights. Dry shares are available now but are not eligible for a value-add return. Bolstad said the new dry shares could be a good investment opportunity for sharemilkers if farm owners could not afford to take up the offer themselves.

Fonterra chairman Sir Henry van der Heyden said no modelling had been done on how much extra equity dry shares could raise but he indicated $550 million, the amount farmers paid into the co-operative just two months ago for milk production shares, could be in the ballpark.

The timing of share buying would also be changed. Van der Heyden said there had been "gaming" of share redemptions by farmers. It was proposed all share transactions start at the new season's share price.

Fonterra commercial milk general manager Jason Minkhorst said there was no incentive for farmers to buy shares early in the season. The change would better reflect that returns should come from capital invested, not milk production, he said. Federated Farmers dairy wing said the proposal, which requires 75 per cent shareholder approval at each stage, was "a step in the right direction" but the main concern for suppliers would be how the milk price would be set.

Minkhorst said a mechanism had been designed to take account of sharemilkers possible interest in the restructure. Fonterra cannot be seen to be interfering in the contracted relationships between sharemilkers and farm owners.

Under legislation governing Fonterra, sharemilkers can buy shares through a private arrangement with farm owners but only a handful have done so.