Fonterra to split payment in two to increase 'transparency'

More than 10 years after the first call to unbundle dairy farmers' payout was made, Fonterra directors are taking the plunge to separate it into a milk payment and a dividend.

The separation will not change the final amount farmers are paid each season, but it will put the heat on the leaders of New Zealand's biggest company to ensure that added-value business investments they make on farmers' behalf are performing.

Fonterra's payout will this year pump more than $5 billion into the economy.

But as it stands farmers have only a hazy idea of how much of that payout is for milk - which Fonterra sells as commodity product - and how much is a return from added-value brand business.

Separation of the returns could see dividends paid in February and June, one industry source said. But the change is expected to take some time to put in place and the split is unlikely to be operating by next season.

Because there is no competitive milk price in New Zealand - Fonterra buys 95 per cent of all milk produced - the farmer-owned co-operative has to "get the numbers absolutely robust" when identifying the two income streams, said Fonterra director Greg Gent.

News of the payout split will resurrect memories of bitter debate in the industry in the 1990s, when some leaders called for a new capital structure consisting of a milk share and an investment share.

The former Waikato-based Dairy Group was a champion of the two-share structure but Taranaki's Kiwi Dairies ferociously opposed it, saying continued farmer ownership of the industry could not be guaranteed if investment shares were created.

The companies merged in 2001 and absorbed the single desk exporter Dairy Board to form Fonterra.

As long ago as 1992 the Business Roundtable was calling for milk payout to be unbundled to improve performance transparency in the industry.

Gent emphasised that the move to separate payout components would in no way delink ownership of the co-operative from milk supply. Only milk suppliers are allowed to invest in Fonterra.

An industry leader - who asked not to be named - said Fonterra's future success depended on the growth of brands overseas, but farmers had been critical for some time about the performance of the value-added business investments. Some had been oversold by Fonterra.

Projected gains from Australasian rationalisation and expansion have fallen short of the $38 million a year laid down in the merger business plan.

Another disappointment has been the much-trumpeted 2002 partnership in Latin America with Nestle, Dairy Partners of America.

Farmers were also given little detail about an investment in a joint venture with a Chinese dairy company.

"So this is not so much about a [new] dividend, but about the expectation for the board to deliver on value-add activity," said the leader.

"Efficiency gains are all very well but the real gains are offshore in [brand] growth."

The new payout dividend will not be a return on Fonterra's fair value share. This share, set by an independent valuer and the board of directors based on Fonterra's projected future earnings, is not linked to payout.

The share is made up of a number of other components, including payment for milk processing and the maintenance and construction of Fonterra's huge factories.

Asked why the separation had taken so long to land on the board table, Gent said Fonterra's focus had been on its evolution.


PAYING DIVIDENDS

* At present farmer shareholders get one single payment reflecting earnings from Fonterra's commodity business and its consumer brands business.

* In the future, the payment will be split. Farmers will receive one payment for the milk they supply. They will then be paid a dividend reflecting the return on their investment in Fonterra Brands.

* The move is aimed at making the value of farmer investment in Fonterra more transparent. It is expected to put added heat on Fonterra Brands to boost performance.