Fieldays: Fonterra's John Wilson Q&A

02:50, Sep 18 2013

A new investment trend in New Zealand dairying is emerging which does not seek an economic return but access to the Kiwi brand and innovation, says Fonterra chairman John Wilson.

Speaking to Fairfax at the National Fieldays near Hamilton, Wilson said the $14 billion industry needed to "think very carefully" about this trend.

He had been asked if, given the growing competition for Kiwi farmers' milk, Fonterra was likely to be able to hold its nearly-90 per cent share of the raw milk market for another five years.

"I would like to see us stay in the high 80s (per cent) but the reality is we are starting to see quite a different investment environment emerging in New Zealand which is not looking for an economic return," he said.

"It is looking to access what is core to us - our innovation on-farm, our innovation in manufacturing and our innovation in product development.

"It's what I call Brand New Zealand and we have to think very carefully about that."

Fonterra needed to keep working strategically to hold the market share it had today, and grow supply, but it accepted and welcomed competition, he said.

Wilson acknowledged some farmer-shareholder discontent about Fonterra's high share price in the wake of last year's sharemarket listing of units in farmer-owned shares, but said New Zealand's biggest company must be the only business in the world to be attracting such criticism from some of its shareholders.

Fonterra's share price has shot up from $4.52 to more than $7 since a capital restructure called Trading Among Farmers (TAF) was implemented in November.

TAF saw a share trading market introduced for farmers, so Fonterra no longer had to trade its shares which exposed its balance sheet to risk, and a listed market for units.

Because Fonterra farmers have to buy shares to supply milk, there is some concern that new farmers, or those wanting to expand, will not be able to afford shares and will retreat to other processors which do not require suppliers to buy shares.

Wilson suggested concerned farmers were in the minority and that it was time to move on from the TAF controversy.

He had "real comfort" TAF had provided much more capital flexibility for farmers and for Fonterra, which was now able to offer initiatives to farmers on how to enter or leave the co-operative.

Those initiatives have included offering three years to pay off shares and a pilot scheme for a guaranteed milk price.

It was still very early days for TAF and it would be interesting to see in two to three years how the market had evolved, Wilson said.

Farmers had spent the first six months of TAF watching from a distance, but in the past month with a bonus share issue, a new supply issue, and release of farmers' rolling share standard last week, farmer-traded volumes were starting to build in the farmer side of the new market.

"The technology is working, the platform is working, the fungibility is there, the liquidity is there," he said.

"We are number three or four in the market on a day by day (trading) average."