Fonterra needs Government tick for its proposed capital restructure. Photo / File
Fonterra needs Government tick for its proposed capital restructure. Photo / File
Agriculture Minister Damien O'Connor and Fonterra leaders appear closer to agreement on the shape of the dairy heavyweight's proposed capital restructure.
Farmer-shareholders have overwhelmingly voted for the proposal, designed to protect Fonterra's future milk supply, but O'Connor has been publicly uncomfortable with aspects of it.
New Zealand's biggest business needsthe Government's tick because it is subject to industry regulation, the Dairy Industry Restructuring Act (Dira).
After telling Fonterra chairman Peter McBride - in a letter McBride made public late last year - he had yet to be assured the proposal would deliver the best long-term outcomes for farmers or the dairy sector, O'Connor said that after discussions with Fonterra leaders he's now more comfortable.
He told the Herald he and his ministry officials hope to give Fonterra and its 10,000 or so farmer-owners "an indication" by June, the start of the new dairy season, "of what the Government thinks is the right balance".
The post-vote discussions with Fonterra were "tracking along quite nicely", he said.
"I doubt whether legislation will be in place [by June] but a clear indication of what it will be is highly likely. There's been very good discussion and debate on the issues."
O'Connor noted, however, that any proposed change to Dira to accommodate the capital restructure would first be subject to a public process through a select committee.
"[This will] provide everyone with an opportunity to make comment and adjustments to be made to proposed legislation if necessary."
Asked if he was more comfortable after discussions with Fonterra, O'Connor said: "I am. We have moved to [a position] where we hope to get the right balance of opportunity for dairy industry innovation and where changes to Fonterra are fair to farmer-shareholders and others in dairy."
Agriculture Minister Damien O'Connor. Photo / Mark Mitchell
Fonterra, owned by farmer-suppliers but offering listed, non-voting, dividend-carrying units in farmer shares, wants to restructure its capital base to support a new long-term business strategy which focuses on the quality and provenance of New Zealand milk.
The world's biggest dairy exporter has said its future relies on its ability to hold its own in an increasingly competitive environment - one rapidly changing due to factors such as environmental pressures, new regulations and alternative land uses.
"We see total New Zealand milk supply as likely to decline, and flat at best. Our co-op's supply depends on the actions we take with our capital structure, performance, productivity and sustainability," chairman McBride said at the time of the successful shareholder vote.
"If we do nothing, we are likely to see around 12-20 per cent decline by 2030 based on the milk supply scenarios we have modelled."
McBride said staying with the current capital structure, called Trading Among Farmers (Taf), was an option but Fonterra risked becoming a smaller and less efficient co-operative.
"If that is our collective decision, we would need to relook at how we implement the strategy based on even more conservative risk settings. Under Taf, we are unlikely to be in a position to achieve the same level of returns in terms of capital and dividends as we have outlined in our long-term strategy."
But O'Connor, in a letter that McBride released before the vote in the interests of transparency, said Fonterra's proposals "envisaged a legislative change to remove key mechanisms that risk weakening performance incentives on Fonterra".
"Without alternative measures, I am not yet assured that these proposals would deliver the best long-term outcomes for farmers or the dairy sector as a whole," O'Connor said.
"I am particularly concerned that the current proposals would create a higher risk of diverging shareholder interests inside the co-operative, between farmers with minimum shareholders for supply only, and those with larger shareholdings held for investment purposes.
"My concern is that this could result in competing shareholder priorities relating to Fonterra's future direction and strategy."
O'Connor said the proposals as they stood were not consistent with the Government's policy objectives and the purpose of Dira.
He was prepared to consider "an alternative, more balanced proposal", and encouraged the Fonterra board to consider further how it might reshape its proposals "to find better balance".
