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Fonterra is starting a consultation process to seek farmer feedback on potential options to change its capital structure, the co-op's chief financial officer Marc Rivers says.
The co-op also announced a trading halt on Wednesday, in order for the consultation process to begin, Rivers told The Country Sport Breakfast's Brian Kelly.
"Although the trading halt is lifted this morning, as part of the consultation process we're temporarily capping the size of the Fonterra Shareholders' Fund by suspending shares in the Fonterra Shareholders' Market from being exchanged into units in the Fund."
This allowed farmers to have "open conversations" and consider all options during the consultation, Rivers said.
The temporary cap was effective from this morning and would remain throughout the consultation process, a decision that was not made lightly, Rivers said.
"We know it'll come as a surprise to some folks, but it is a necessary step to make sure that we can keep all our options open throughout the entire consultation process."
Fonterra's board spent a "significant amount of time" looking at a wide range of capital structure options - including staying with the current model, Rivers said.
Alternative structures were also considered, (see below), but the board put forward its preferred option - a Reduced Share Standard with either No Fund or a Capped Fund.
"We believe the best option for our co-op is to move to a structure which reduces the number of shares that a farmer would be required to have, to give more flexibility to farmer ownership" Rivers explained.
Fonterra would then either remove the Fund entirely, or cap it to keep it from growing further.
This was in order to protect farmer ownership and control, which was "absolutely essential," Rivers said.
Under this option, the minimum requirement for farmer owners would be one share for every four kgMS supplied to Fonterra, Rivers said.
"That compares to the current requirement, which is to have one share for every kgMS supplied."
At the other end of the scale, farmers could hold shares up to a maximum of four times their milk supply, Rivers said.
Overall, this option would make it easier for new farmers to join the co-op, while giving more flexibility to existing farmers, who may want to free up capital, or were working through succession, Rivers said.
One key outcome of this change was that shares would be bought and sold between farmers in a farmer-only market.
"But for our farmers ... these changes could impact the price at which shares in our co-op are traded, and there may not be as much liquidity in such a market," Rivers said.
Ultimately, the price for farmers' shares would be determined by the performance of the co-op and trading between farmers.
Fonterra encouraged farmers to share their views on these and other features, Rivers said.
"What's critical is ... to get on and begin consultations, and get out and really start the conversation, and listen to what everybody thinks about this."
Alternative capital structure options considered by Fonterra's board
• Dual share structures, which would move from the current single co-operative share to a compulsory supply share and a separate non-compulsory investment share.
• Unshared supply structures.
• A traditional nominal share structure;
• or, a split co-operative model.