Loss-making Fonterra is not rethinking its profit retentions and dividend payout policy as part of its current strategic review.
This despite a poor retentions history being considered to be partly responsible for its weak balance sheet and share price performance.
Fonterra's stated dividend policy is a 70 per cent payout and critics say for 10 years it has made no meaningful retentions.
Opinion among the big co-operative's farmer-owners and industry observers is firmly on the side of retentions being used to help rebuild its balance sheet, but Fonterra in a written response to the Herald said: "The retention and dividend policy is not part of the strategic review".
Fonterra Shareholders' Council chairman Duncan Coull: "The question needs to be asked, what are the impediments to growing value for shareholders and if the answer to that is capital and we want to remain true to who we are being a cooperative, then yes, shareholders need to have a discussion around retentions."
Asked if he was surprised the company's internal strategic review - announced along with its $196 million historic annual loss last month - was not considering retentions and dividend policy, Coull declined to comment.
"One could argue as a co-operative we've been half pregnant for 17 years. We've been talking about growing value yet as farmers we haven't left any on the table because most of what Fonterra has earned has been paid to farmers in the way of dividend.
"If we are serious as a co-operative, farmers need to start thinking about whether we need to get serious about growing a value-added business and if capital is required to do that then retentions may be required."
But Coull said Fonterra leaders had to "earn" the right to further capital and retentions.
"I think there's some way to go to rebuilding trust in that respect."
Coull said Fonterra's farmers had already made "a strong retention" this year when the board shifted 5c/kg - about $70 million - of their due milk price into the earnings side of the balance sheet.
A shareholder who declined to be named said retentions "are probably the only choice" to repair the balance sheet.
"The problem they'll have with selling assets is they'll be deemed to be an urgent seller and that's not great for maximising price.
"The challenge with retentions is once they start, competitors will get even more advantage. But they have to make retentions, there's no way out of it."
The level of retentions acceptable to shareholders would depend very much on the price Fonterra pays for milk.
"If the milk price is better than $6 (per kg milksolids) they can be more aggressive with retentions - most farmers can make a good living at $6. If the milk price dips - and we know it will - that makes retentions way harder," said the shareholder.
Fonterra this week reduced its milk price forecast for the current season to a range of $6.25-$6.50/kg milksolids, down from $6.75.
Respected dairy industry commentator and advisor Keith Woodford said Fonterra "needs to have retentions like any company".
"Any company that pays out all its profits is heading down a really dangerous path. The problem for Fonterra is they've had 10 years of minimal retentions ... you can't rectify 10 years of flawed policy in one or two years."
Woodford noted European co-operative Friesland Campina retained 50 per cent of its profits.
"Selling assets now will help them get out of their situation of having too much debt ... but if you don't have a retentions policy you get back to the same old situation.
"Their need to sell some assets is a consequence of not having significant retentions over the last 10 years combined with some disastrous investment decisions they've made, particularly in China," Woodford said.
Shareholder and MyFarm investment company chief executive Andrew Watters said any retentions would need to be off a 40-50 per cent operating profit per share.
"I can withstand retentions from that but it's pretty hard to withstand significant retentions from a 25c/share earnings result."
"If they get those earnings up then sure I'm supportive (of retentions). If we're confident the money is going into the New Zealand milk price and these earnings are going to flow back to New Zealand unit holders then I can support that."
Shareholder and Tirau vet Ian Scott said retentions would be needed to "build strength back into the balance sheet".
"The milk price is set by the milk price manual so they can't tweak that. They're going to have to do retentions."
But Scott said the historical lack of retentions wasn't the whole problem.
"It's the way the money's been spent. It has not generated the income McKinsey and the board said it was going to. The offshore investments entered into are evaporating money not making it. That's what's created the weakness in the balance sheet - the total non-performance of poorly investigated and executed investments."
Dairy industry specialist analyst TDB Advisory said the key strategic question facing Fonterra was not about its mix of funding or its retention rate.
"It's about Fonterra sorting out what is its core business and what is its strategy and structure that will best add value to shareholders," said director Phil Barry.
"Once it's got that right, the next question is how does it fund its strategy - for example, through debt, equity, asset sales, increasing its retention rate etc."
Barry said different retentions suited different companies at different times. He noted young dairy companies A2 and Synlait had always had 100 per cent retention rates.
"That is, they've never paid a dividend. Their shareholders are prospering through share price growth because the companies have got great strategies and are investing in the right areas."
TDB, in a recent report, said Fonterra's dividend distributions had been volatile and had not shown any clear trend over time.
The lowest dividend had been 7c/kg milksolids and the highest 59c/kg. On average, the annual dividend had been 29c/kg, the same as the dividend in 2001, the year Fonterra was created from an industry mega-merger.
Asked about the progress and timeline of its review, Fonterra said it would provide details on the outcome and actions "at the appropriate time".