Doing nothing a greater risk

For years we have listened to farmer groups complaining about the high dollar and the way the Americans and Europeans distort dairy prices with subsidies. Nothing seems to change.

Yet it seems dairy farmers would rather live with extreme volatility year on year than contemplate floating a minority stake of their consumer foods business on the NZX.

The irony is that dairy farmers fear losing control if Fonterra lists, yet the status quo leaves them powerless to control the price they get for their produce.

The payment they get for the milk powder that Fonterra sells wholesale to the world rises and falls on the fortunes of the US dollar and the supply and demand dynamics of commodity markets.

Meanwhile Fonterra has talked big about the future of its consumer foods business since its inception. That is a business - selling high-value, branded retail products - that could bring stability and steady growth to Fonterra's earnings.

If it was successful, it could rival Nestle. It would unlock equity for farmers, it would provide dividends in excess of those it currently contributes to the payout. And it could create share value which could be unlocked by farmers on retirement.

But now it is failing to deliver anything like the results hoped for. Last year, of a $7.90/kg milksolids payout, just 31c/kg came from the value added part of the business.

Some farmers may blame their management. But the business is constrained by the structure of the co-operative. It needs capital and it needs to expand its scope.

The limits of what can be done to boost returns out of a wholesale milk powder business have largely been reached. Fonterra's commodity business is already big and efficient. It has constraints on the volume of product it can source and it is about as lean as it can get. For farmers the cost of producing dairy in this country is not going to get any cheaper.

The board knows all that. But it's hard to blame them for taking this decision. They have done so because they see no way that farmers will agree to a listing.

The threshold for a change to the constitution is 75 per cent approval. We know that the board sees merit in a partial listing because that is a proposal they tried to have approved in 2007. But they failed.

This time they have avoided another beating from their shareholders for wasting time and money on something that doesn't stand a chance. Fonterra still has a capital restructuring process to go through but it is unlikely to address its fundamental problem facing the co-operative.

So the decision to rule out market listing is frustrating and disappointing. But this aversion to capital markets is not peculiar to dairy farmers. It is just a reflection of the wider public's fear of asset sales.

Like the Fonterra board, the Government has ruled out partial listing of state assets in this electoral term. New Zealanders - still scarred by the poorly executed sell-off of the 1980s and 1990s - don't see the value that could be created by floating a 20 per cent stake. They see only the risk that they will lose control to foreign shareholders.

They don't see the greater risk of doing nothing and watching each successive generation of New Zealanders settle for slightly less than the last.