Legislation that includes changes allowing Fonterra to start share trading among farmers is crucial to both the dairy co-operative and the country, says chairman Sir Henry van der Heyden.
Van der Heyden, who yesterday addressed the primary production select committee, said the proposed Trading Among Farmers system would enable Fonterra to remain the national champion needed by its farmer shareholders and the country.
Dairy products account for about 30 per cent of all merchandise exports.
"We need a stable permanent capital base to implement our refreshed business strategy that will drive returns for our shareholders, and to also protect the co-op from future shocks such as a major drought," van der Heyden said.
The Dairy Industry Restructuring Amendment Bill passed its first reading last month and includes changes that enable Fonterra to move to its proposed Trading Among Farmers system, should the co-operative choose to do so.
Fonterra's proposal aims to remove redemption risk and provide permanent share capital, with farmers buying and selling shares among themselves rather than with the company.
Under the proposal farmers would be able to place shares with a Fonterra Shareholders' Fund and be paid the share value for the rights to dividends and any change in market value, while retaining voting rights.
The fund would raise the money to pay farmers by selling investment units, which would be managed through the stock exchange.
The proposed capital structure change was given 89.85 per cent support by farmers in 2010.
Van der Heyden said the dairy co-operative would go back to its farmer shareholders for a special meeting in late June at which it would outline the detail of how Trading Among Farmers would operate and hold a final vote.
Last month he said that while the majority of shareholders was urging directors to get on with Trading Among Farmers, there was a small group who had concerns.
Primary Industries Minister David Carter has said the amendment bill would oversee Fonterra setting the price it paid farmers, ensuring a competitive and innovative dairy industry.
Van der Heyden said the bill would enshrine in legislation Fonterra's mechanism for determining the farm gate milk price "which is robust, transparent, and can't be influenced".
"Our view is that the bill entrenches things we already do. It also establishes a role for the Commerce Commission in reviewing and auditing this process," he said.
"We don't think this regime is necessary, but we can live with it."
Although the co-operative supported most of the changes in the bill, it had identified some sections that needed to be amended to ensure Trading Among Farmers could operate effectively, he said.
Competitors charged that Fonterra was calculating inflated milk prices not only to ensure its farmer shareholders got the best possible farm gate price, but also to stifle competition, reduce the overall capital value of the co-operative, and reduce dividend payments accordingly.
A joint submission from independent dairy firms Synlait, Miraka, and Open Country feared the proposed legislative changes would lock in arrangements that allowed milk price calculations based on a mythical "super-competitor", which bore no relation to the reality of most New Zealand dairy farms.
- Additional reporting BusinessDesk