Fonterra runs into problems with farmers

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Fonterra directors have flip-flopped on the cooperative's controversial capital restructuring and their advocacy for floating shares in an operational arm.

"The board (of directors) will investigate options that would see Fonterra remain a fully integrated farmer-owned co-operative," Shareholders' Council chairman Blue Read said.

Fonterra is in the middle of a major bid to rejig its capital structure, but has run into problems with farmers who do not like its preferred option of floating the shares of an operational subsidiary.

In February, the cooperative abandoned a farmer vote on splitting into a milk-supply co-operative and an operational subsidiary, and in April promised it would put more options to farmers.

"Despite considerable initiatives to outline Fonterra's strategy, there remains a lack of buy-in among farmers," the council said today.

When the float was first proposed, the co-operative's nearly 1.28 billion shares - estimated to be worth $6.79 each - meant it could have had a market capitalisation of $8.7 billion compared with the then $7.1 billion market cap of the largest listed company, Telecom.

But Mr Read said today the council is worried that the gutted investment in China - where a joint venture company, Sanlu, sold toxic milk that killed babies - and the debacle over changes to the cooperative's capital structure may erode farmer confidence in its governance and future direction.

"Without the unequivocal support and confidence of supplying shareholders for the leadership and the direction of the business, implementation of Fonterra's strategy may be jeopardised," the shareholder council warned today in its annual report.

"The council believes that poor project design, communication and implementation resulted in the review consuming an unnecessary amount of time and resource."

Some farmers have been concerned that the outside investment would create a tension between achieving the lowest possible price milk to boost margins and dividends, and their own ambition to receive the highest possible milk price.

There were also concerns that the co-operative's directors could dilute their initial 65 per cent stake in the listed subsidiary to just above 50 per cent, without further consulting farmers.

The shareholder council warned today that farmers set the bar higher when considering the merits of Fonterra strategies that might in any way jeopardise the co-operative and their farms and homes.

"Many respondents questioned the wisdom of opening up the co-operative to non-supplying shareholders," it said. A number expressed concern about the co-operative's international investment strategy because of the risks.

"On reflection, the council considers that we should have advised the board prior to November 2007 not to commence shareholder consultation until the matters we had raised had been properly addressed.

"The council could also have done more to inform shareholders of our concerns about the preferred option."

In future the council will keep farmers informed of its deliberations as it progresses to a final position.

Now the shareholder' council and directors will jointly review the "co-operative philosophy" and shareholder consultation on any one favoured capital structure option will not begin until all the relevant work has been completed and full information is available.

The board will provide shareholders with greater detail from its business plan, the value of integration will be demonstrated to farmers, and no proposal will go before shareholders without the support of the council.

The capital re-structure was intended to address redemption risk, capital for growth and investment choice and the council said it was "frustrating" that there is no clear and agreed direction on capital structure after nearly two years.

- NZPA