Fonterra could face ‘acute’ pressure

00:09, Jun 30 2010
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CRUNCH TIME: Fonterra farmers are likely to be trading shares among themselves by September 2011 with the co-op's heaviest shareholder voter turnout suggesting a win for its directors in a critical vote today.

The balance sheet of New Zealand’s biggest company, Fonterra, could come under “acute” pressure quickly, chairman Sir Henry van der Heyden told thousands of its shareholders today at meetings to vote on a critical change to  capital structure.

The result of the cooperative’s farmer-owners’ vote on whether to introduce share trading between farmers will be announced imminently.

Fonterra directors need a 75 per cent vote of approval for share trading so the company can stop having to pay cash out to farmers exiting or reducing their milk supply.

Shares in the giant dairy company are linked to milk supply and hundreds of millions of dollars have flowed in and out of its balance sheet in recent years, because of drought.

Share trading is the third leg of a capital restructure.  Two earlier more minor steps have been approved by Fonterra’s 10,500 shareholders.

Sir Henry said when Fonterra was created from a huge industry merger nine years ago it was known its capital structure would have to change one day because the balance sheet would come under pressure.


“New Zealand’s milk supply can’t just keep on growing at the same pace it has been forever. Also there are physical limits to the expansion of dairying, and alternative land uses may take some land out of dairying in years to come,” he told shareholders in Palmerston North this morning in a speech televised to six other meetings around the country.

“If there’s a limited pool of milk, other processors will always want a slice of the action, and we may see some well-capitalised competitors from overseas competing with us for milk.

“The cold hard reality is that there’s every chance our co-op will have periods of lower growth in our milk stage.....and with the current capital structure.. Fonterra’s balance sheet could come under acute pressure.

“This could happen quite quickly. And it would be very difficult to fix our capital structure while Fonterra was facing this sort of financial stress.”

Share trading among farmers would also provide permanent capital to pursue the company’s growth ambitions and global strategy and achieve the transparency farmers need about the value of their shares, he said.

The share trading proposal would see Fonterra remaining in the control and ownership of its farmers.

No market listing is being proposed, however the public would be able to buy units in a planned shareholder fund.

The fund will offer cash to farmers for the dividend and value-change rights to their shares, but ownership would be retained by farmers.

Sir Henry said there would be “further evolution” of Fonterra’s capital  structure.

 “No board can think their company’s capital structure will be static forever. Circumstances change.”

Chief executive Andrew Ferrier told shareholders that with permanent capital Fonterra could “invest with confidence in long-term opportunities and maximise returns for your milk”.

“Right now, we can’t put all of your share capital to work to generate the best returns because some capital has to be kept available in case it’s needed to pay out redemptions. The sheer scale of Fonterra means that this is no small issue.”

Fonterra is the world’s biggest dairy exporter, with a growing brand and business name in some of the world’s most populous and protein-demanding countries, such as Asia, the Middle East and South America.

Last year the company had revenues of $16 billion and earned 22 per cent of New Zealand’s export returns.

Since its formation in 2001 it had invested $6.8 billion, mostly in New Zealand, Mr Ferrier said.