Who will own Fonterra?
New Zealand's dairy giant is grappling with possible changes to its share structure. Hannah Grant outlines the debate over Fonterra's future.
Fonterra recently agreed to give its farmer-shareholders another vote on the controversial share trading among farmers (TAF) proposal, which will see an end to its open-entry-and-exit shareholder regime.
This means when farmers surrender their shares – either because they produce too much (go over Fonterra's share threshold), too little (because of climatic conditions like drought) or leave to go to another supplier – Fonterra will no longer be obliged to buy and sell them. Farmers will need to find their own share buyers.
A majority of Fonterra farmers voted for the TAF concept in 2010. Since then there has been loud opposition to its implementation, leading to the acknowledgement that a new vote is needed on the scheme. This is now set to take place in June.
Property lawyer Pater Fanning, a partner at Tompkins Wake lawyers, says there are both pros and cons to the TAF proposition. He says as it stands, redemption risk (the ability for farmers to surrender their shares in Fonterra) depletes the capital available to Fonterra for building the business.
"TAF, designed as a collective, will potentially help remedy this risk. As a collective taking a wider view you would say that this is good for our industry, because it means that your business won't suffer seasonal washouts of capital and can therefore plan better. From a co-operative level, it is a good defensive move," he says.
Although most farmers are probably aware this change is on the cards, Mr Fanning explains there is a danger of leakage from marginal shareholders who may decide to go with other suppliers without share options who give a similar payout.
"From an individual's point of view, there are costs to this proposal. Shares will be harder to sell and may be seen as less valuable for security purposes. For some shareholders who might be close to their banking covenant, this lessened security may be the straw that breaks the camel's back and puts them into default."
Currently Fonterra's 10,000 shareholders all come from within its co-operative. It is proposing though, that the dividend rights, elasticity rights and the capital value be bundled together and then offered out and sold to people outside the dairy industry.
Because of this potential for outside influence, many farmers are worried they will lose control of New Zealand's biggest company.
Whakatane farmer Robin Barkler values Fonterra, but is not a supporter of the proposed changes. He says introducing outside capital never works, because you have two different types of investors that have different drivers.
"Farmers are in for the long term with ups and downs, whereas outside investors want to see maximum return on their investment. Internationally there has been no example of a model like this with a co-operative that works. In the Bay of Plenty, Fonterra is the only option. Mr Barkler is worried introducing share trading among farmers and among outside investors will affect the price of milk.
"Outside investors could challenge the model of payments between milksolids and dividends, which could effectively decrease the milk price – which is very worrying. They also may have an influence about who gets on the Fonterra board, which too could influence milk price."
If the proposal comes into effect, farmers will sit tight and see what the market does for the first couple of years.
This will mean minimal share trading, says Ann Thompson, Federated Farmers dairy policy adviser.
"Farmers will still want to enter and exit Fonterra if they wish, but this ability will be dependent on other farmers buying or selling their shares.
"If TAF comes in, farmers will be able to list what shares they want to sell on to this market and farmers who want to enter will be able to buy these shares every day at the market rate at the time," she says.
TAF will see shareholders given the option to fully "share up" over three years so they can buy all their shares at once, or over a three-year period when they can afford it or think it will be financially beneficial.
"Savvy business people, who are farmers, will understand this pretty quickly. They will be able to see that that can place shares both at buying and selling at the same time.
"Shareholders will need to get advice for the best possible outcome for them," she says.
Hannah Grant is a journalist at the New Zealand Law Society. If youneed advice or wish to learn more about the legal topics covered here, contact a rural property lawyer who is also a member of the New Zealand Law Society's property law section (propertylawyers.org.nz)
The Southland Times