John Stevenson, chair of the Fonterra Cooperative Council, says the dairy heavyweight's performance is "pleasing, not outstanding". Photo / Supplied
When you’re the watchdog keeping an eye on New Zealand’s biggest business, it stands to reason that the more information you get, the better you can do the job - right?
Not if the watchdog is the Fonterra Co-operative Council.
In a weird twist of logic, the council of elected farmer-shareholders says it can do a better job of holding the giant dairy company to account now that it no longer receives confidential information from the board of directors.
New council chair John Stevenson says the 26-member council was previously muzzled by that information, especially as Fonterra has dividend-carrying, non-voting units listed on stock exchanges on both sides of the Tasman.
It meant that while the group, part of Fonterra’s constitution, got financial results slightly ahead of the rest of us, it had to keep mum.
The result, says Stevenson, was that the co-operative’s 9000 farmer-shareholders couldn’t hear the “hard questions” councillors asked directors and management. That raised questions about the $3 million-a-year council’s usefulness, particularly during Fonterra’s disastrous 2018 and 2019 financial results, when it posted heavy losses. (In 2019, the council reported $4 billion had been wiped off shareholder balance sheets since 2017).
Questions about the council peaked in 2020 after a shareholder revolt. Major shareholder Colin Armer called it “inept”, and an independent review recommended the council should no longer receive confidential information.
“The 2020 review of the council really clarified our role, we’ve been able to implement all the recommendations and our workstreams have become a lot more settled,” says Stevenson, 38, a fifth-generation dairy farmer in the Wairarapa.
“We are strictly here as a representative body, we don’t receive confidential information from the board and that means we aren’t restrained in our ability to hold the company to account in public forums.”
The council, which by review time had received shareholder funding of more than $50m since it was created along with Fonterra in 2001, still has its critics. Questions remain over what it actually achieves with all that money. But the grumbles have muted as Fonterra’s revised business strategy produces better earnings, and as farmers enjoy a strong global milk price - until inflation started taking a big bite out of it.
Stevenson, a less defensive chair than some who have gone before, says some of the criticisms which prompted the review were “valid”.
He says feedback suggests farmers are happier with the new level of council transparency and there’s plenty of fodder for tackling Fonterra.
But first, let’s ask Stevenson why it costs $3m a year to represent the shareholders (bearing in mind farmers are a feisty lot, unafraid to speak their minds) of a $23 billion revenue company, which at first blush looks like a corporate by another name.
Why, like corporate shareholders, can’t farmers just gather at an annual meeting to vote, air grievances, discuss challenges and hire and fire their directors?
It’d be cheaper: the council’s budget for the 2023 financial year is $3.03m which, it is quick to say, is $0.0018 per kilogram of milksolids based on Fonterra’s 2021-22 milk collection of 1478 million kg.
The short answer is that Fonterra is a farmer-owned co-operative and in the corporate world, farmers, completely reliant on someone to collect their highly perishable product, are an endangered species.
There’s strength in numbers and a tight collective. (While “outsiders” can buy Fonterra units, only farmers can own shares in Fonterra.)
Stevenson puts it more elegantly: “We are here to be the check and balance to ensure Fonterra acts in the interests of farmers rather than in the interests of investors”.
“You don’t have to look too far overseas to see what’s happened to co-operatives that have become corporates. When you are producers of a perishable product, you can’t be too far away from the processing of it. Farmers aren’t doing well in Europe and the UK. Look at Australia where there were long-standing co-operatives. There’s a huge amount of excess stainless steel now.
“We are in a really unique position in that we do have a strong co-operative that essentially sets the milk price for a lot of other milk companies. If we lose that, I think we’d be in a really bad place as an industry, as farmers and as a country.
“If you look overseas, what happens when farmers, particularly dairy farmers, don’t have a strong co-operative, they end up being price takers.”
Even 22 years after its creation from an industry mega-merger, Fonterra - the world’s sixth-biggest dairy company - still collects just under 80 per cent of the country’s raw milk. Given that it was created by a special law allowing it to bypass the Commerce Commission, Fonterra’s enduring dominance is a sore point with private dairy companies that have emerged since 2001, but that’s another story.
Stevenson says it is not well understood just how important Fonterra’s annual milk price calculation is.
“Within a purely corporate environment, the goal is to reduce your input costs whereas as a council, we are very focused on ensuring the milk price calculation is followed and we push for high input costs – that’s what pays our bills.”
So what does the council actually do?
“As a co-operative, it’s really important farmers feel connected to their co-operative and have a voice, and are heard,” says Stevenson.
“We report to the board regularly on farmers’ views and we ensure there is independent assessment and analysis of Fonterra’s performance. We write a letter of expectations to the board each year to ensure there is no doubt whatsoever what the owners want to achieve. We ensure there is a fair and measured process for selecting directors.” Most Fonterra directors are farmers, and the chair must be a farmer-shareholder.
When significant issues crop up, the council can commission independent reports. It also runs a co-operative education programme.
But gone are the days when the council was seen as a nursery for aspiring Fonterra directors. Some councillors rose to be Fonterra chairs.
“In my view this is not its function and never should have been,” says Stevenson. “We do have a role in identifying people who have a future in rural governance, but not from the council.”
So, both Fonterra and the council appear to be getting their acts together: Fonterra by abandoning its loss-making pursuit of building overseas milk pools, in order to focus on promoting the quality of New Zealand milk; the council by clarifying that it isn’t a shadow board or a cornerstone shareholder.
But not all is calm on the farm.
A dive in the farmer share price still rankles as Fonterra ushers in a new capital structure, and farmers have been on edge for months about what policy Fonterra is cooking up on what are known as “Scope 3″ carbon emissions.
Stevenson says the council is also taking a hard look at Fonterra’s consumer businesses, “which have been underperforming”.
Scope 3 emissions are the result of activities by assets not owned or controlled by a particular organisation, but by others for which it is indirectly responsible, up and down its value chain.
“Farmers still have plenty of questions about Fonterra’s choice to be a leader in sustainability,” says Stevenson.
“While they understand that is what customers are looking for, we need to see clear evidence that it translates to income in the pocket – if the juice is worth the squeeze.
“We’ve been asking the question for 18 to 24 months now in terms of the value of this. There is some unease about how fast we are going to have to meet some of the sustainability requirements on-farm.”
Farmers, struggling with 15 per cent-plus on-farm inflation, and with the previously robust milk payout now barely above break-even, have to make budgeting and investment decisions for a year and more out, Stevenson says.
Yet the additional costs of meeting Scope 3 requirements are still unclear.
Nor is it known whether those requirements will be “an incentive or bottom line”.
“We work really hard to improve our productivity but to make those big investments in technology, we need to have confidence they are going to pay off.”
Fonterra chair Peter McBride told the Herald the company had signalled its intention to set an on-farm emissions target in November. It had since consulted “hundreds” of farmers in a collaborative effort, “but a consequence of this approach is we don’t have all of the answers right now”.
More farmer meetings would be held next month and it was intended to announce the target “in the middle of the year”.
While Fonterra’s new capital structure is welcome because it makes it cheaper for new farmers to join, or farmers expanding production to buy more shares, the company’s bid to shore up its future milk supply to counter shrinking national production has come at a cost to shareholders.
The farmer share price at the time of writing was $2.77. That’s up 6.5 per cent on a year ago, when the regulated Fonterra was awaiting approval from the Beehive for the capital restructure and uncertainty reigned. But it’s 51.5 per cent down on the share price five years ago.
Stevenson says shareholders, in approving the restructure late in 2021, knew it would involve a 20-25 per cent discount on their share values because the unit market was being restricted along with the share standard change.
“What we have seen is in excess of that, which is certainly a point of note for some farmers. For those looking to borrow money, that’s a significant amount of equity off their balance sheet, and it’s relevant to farmers looking to exit the industry. It’s quite material for them.
“[However] for those of us fairly committed to the industry and looking to stay in it, I suppose you could take a bit of confidence from the vote supporting the capital restructure – it was really strong.”
Stevenson says trading of the shares has been thin, with farmers until recently uncertain about when and how much capital Fonterra would return to them after selling its Chilean business Soprole.
Whether the relaxed share entry standard works in retaining milk supply “remains to be seen”.
“It removes an impediment to joining, but it also ramps up the pressure on Fonterra to deliver, to deliver and demonstrate consistent financial performance so there is good value in owning a share.”
For Stevenson, it’s all about “consistency” now. So far, performance is “pleasing, I wouldn’t describe it as outstanding”.
Brendan Attrill was named the 2025 National Ambassador for Sustainable Farming.