Unco-operative: Taking a stand

There's a rift in dairying ranks. And that's uncommon in the industry renowned for its co- operative nature. Jill Galloway reports on farmer response to Fonterra's plans to shelve, for the moment, its plans to restructure.

Dairy farmers usually speak with one voice on their industry. But not so when it comes to outside shareholding. The townie shareholder - friend or foe?

It depends on the farmer's stance. Outside shareholding brings money (maybe $10b), but it could be the beginning of the end of farmer control of the New Zealand dairy industry.

That's the dilemma.

Fonterra began talking to its 11,000 farmer shareholders in November at meetings held at major venues around the country. Two-hundred and fifty people attended in Palmerston North.

What the co-operative had was a grand plan to take on the world. To grow new markets, particularly in developing countries. It said it would list on the stockmarket to raise billions of dollars from new investors. Farmers would have a smaller slice of the pie, but the pie would be bigger, Fonterra said.

As part of that grand plan, Fonterra went to farmers with a proposal to change the current Fonterra co-operative into two entities. It proposed putting all its assets and liabilities into one company (Fonterra), which would list publicly, while the other would become the milk-gathering co- operative only (Fonterra Co-op). At least 20 percent of shares in Fonterra would be open to public shareholding. Shareholding would be limited and any more than half the company, required farmer support of more than 75 percent.

Just one problem. Many farmers weren't that keen on putting all their dairy assets into one company, then opening it up to, even to limited outside shareholding.

The thin end of the wedge they thought.

Fonterra has had a rethink.

It has suffered a major, perhaps fatal, setback and has cancelled a direction-setting farmer vote on the proposal in May. It would have been to approve changing Fonterra's structure into two entities and the introduction of a new mechanism to calculate the milk price.

Fonterra chairman Henry van der Heyden admits the co- operative would have been "very unlikely" to get the required 75 percent farmer support at the vote in May. But he says the board still hopes to achieve its preferred option and list by 2010.

In his letter, cancelling the May vote, Mr van der Heyden said the board spent two years looking at a large number of options for capital restructure. And it remains firm in its view, that the plan put to farmers in November, is the best one.

"Since November 15 we've had a very good engagement with farmers and what they are telling us is that there's a degree of discomfort and they need a lot more information."

It is that desire from farmers for more information, that Fonterra says is behind the delayed vote rather than that farmers don't want a bar of outside money and influence in 'their' industry.

Rongotea-based dairy farmer Bob McVitty, has dairy interests around the southern North Island. He is thrilled Fonterra has called off the May vote.

"We won't see a vote on restructuring with farmer loss of control in my lifetime," he says.

It means, Mr McVitty says, farmer control will be retained, something he is a strong believer in." I'll go to my grave happy now."

He had earlier raised his fears about the Fonterra plan.

Opening up of Fonterra to public shareholding will mean the end of the co-operative as farmers have known it and the end of farmer control, he warns.

He says there are plenty of other farmers who share his concerns.

"This is the single biggest issue we've faced since the Dairy Board was created. It will be the end of the co-op system . . "

The concern is the tension between farm and non-farm shareholders.

"Why milk cows, when you can take a share in the returns and influence decisions through investment funds?" Mr McVitty asks.

The biggest problem will be setting the milk price, he says.

"If it is too high, the share price and returns suffer and if it is too low, farmers will be screwed."

He talked about a similar float of shares in Ireland and said the result was farmers lost control of their own company.

Manawatu/Rangitikei Federated Farmers dairy president Andrew Hoggard believes the public shareholding is the stumbling block for many farmers.

"Cancelling the May vote is the right decision. I don't think the idea is dead in the water. But farmers want more information. There is lots of misunderstanding about the consequences," he says.

"What will happen if farmers go with the Fonterra proposal has not been fully explained. And neither has the co-operative explained clearly what the costs are of not listing on the sharemarket," Mr Hoggard says.

What opportunities will be lost if the New Zealand dairy business does not expand? he asks.

"They've got a fight on their hands regarding the sharemarket listing though."

No other co-operative that he knows of that has fully listed on the sharemarket has kept farmer control, he says.

"What farmers want is the maximum value of the processed milk. Shareholders want that, too. But farmers also want the maximum value of their raw milk. That is not in the shareholders' interest."

Like Mr McVitty, he sees milk pricing as a major bugbear for Fonterra farmers.

Mr Hoggard wants to see a clear strategy spelled out to farmers. "My gut feel is unless there's some threat on the horizon, Fonterra will not get support for any listing on the sharemarket."

Dairy farmer and former Manawatu/Rangitikei Federated Farmers president Shelley Dew- Hopkins says she believes Fonterra underestimated the interest of farmers in the restructuring proposal.

"I think they did a very poor communication job on us. It is a wise move to have slowed down the process."

She says she thinks that the way businesses are financed is changing. "As farmers we need to think longer term and bigger picture on how we will keep pace in a global marketplace."

"We, as shareholders, did agree to Fonterra's strategy of growth. In order to fund it we may need to change our 100 percent ownership of the co-operative."

Ms Dew Hopkins says she saw a great quote that says "we can either have 100 percent of a grass hut or 25 percent of a Manhattan skyline, what would you rather have?"

She says farmers big fear is that they will agree today to a 20 percent outside shareholding now, but farmers in the future, will become apathetic again and let a minority sell off more and more of farmer ownership.

Whether or not Fonterra can make a sufficiently compelling case to change the minds of enough of its farmers remains to be seen. Previous dairy company votes suggest it is not given to giving in easily. No votes have been taken several times on occasions and they've been put again and again, until they pass,

A 2010 listing now appears unlikely.

Legislation would have been introduced into Parliament in preparation for a second farmer vote in 2010 to approve letting outside investors into Fonterra.

The Fonterra Shareholders Council, which had not formed a definite view on the plan, described the decision to postpone the may vote as prudent and consistent with farmer and council feedback.

"I wouldn't call it a dead duck yet," says Shareholders Council chairman Blue Read.

But farmers wanted more certainty about their ability to retain control of Fonterra and more detail around the milk pricing mechanism, Mr Read says.

Any changes to the preferred option would depend on feedback from farmers in the coming months, Mr van der Heyden says.

"This is a genuine consultation process. We'll take it step by step."

- © Fairfax NZ News