Fonterra payout structure changes

OPINION: Recently, Fonterra shareholders voted for various capital structure changes, writes Sarah McKenzie in this week's Work to Rule.

Importantly, the payout structure has changed so that the "value-added" portion of the payout will now be paid as a dividend to shareholders. This has implications for the sharemilker and their relationship with their farm owner or Fonterra shareholder.

Before the changes, the entire payout (the milk production portion and the value-added part) was split between farmers and sharemilkers, usually 50-50 but depending on their agreement.

Now that Fonterra is legally obligated to pay this dividend directly to its shareholders, sharemilkers will have to sit down with their farm owner or Fonterra shareholder to ensure their payment matches what was agreed upon in their agreement.

Fonterra has developed the dividend-related payment-adjusted form (DRPA) that was to be completed and returned before February 28. The form allows Fonterra to make an adjusted payout from the milk price portion to the sharemilker. If it wasn't completed, Fonterra would simply pay the farm owner or shareholder the entire portion of the payout. However, another letter will have now been sent to the farm owner or shareholder to confirm that this is correct. If it is not, then they have until March 21 to complete the election correctly.

Non-completion of the form will affect sharemilkers because they will have to arrange for a late repayment that in turn will likely affect their income and budgets.

A 50-50 sharemilker on a farm producing 150,000kg of milksolids per year may lose out on $15,000 next year. But if milk prices remain high and that portion of the payment grew (as Fonterra predicts), they could be out of pocket by $50,000. If farm owners, Fonterra shareholders or sharemilkers fail to return the form, this may negatively impact on their on farm relationship.

Fonterra is working on a new sharemilking agreement, but the current agreement is still operative. Any sharemilkers entering into a new agreement in the next few weeks need to be aware of this and negotiate with their farm owner for equal (or whatever is agreed upon) payment of the value-added portion of the milksolid payout.

Once they do this, the important thing to remember is to ensure the farm owner completes the election correctly by March 21 so the sharemilker gets their portion of the value added payout. This key date also applies to any sharemilkers still under the old agreement.

» Sarah McKenzie is a partner at Preston Russell Law.

- © Fairfax NZ News

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