Editorial: High hopes for Fonterra moves

OPINION: Farm leaders welcomed the outcome of Fonterra shareholders' vote on their company's capital structure as a victory for the cooperative model.

"It's a model that works and a model that will keep Fonterra in Kiwi hands," Federated Farmers Dairy vice-chairperson Willy Leferink enthused.

The overwhelming vote of support means the Fonterra board can go ahead with changes to shareholding entitlements and share values. Next step will be a vote to allow trading of shares between farmers, without them first having to be sold back to the co-operative.

The company has around 10,430 shareholders, but the consequences are of national significance. As Prime Minister John Key told the Federated Farmers national council on Wednesday, while the company was announcing the vote result in Ashburton, "Fonterra has a big impact on the New Zealand market, so its fortunes play a big part in the fortunes of our country".

Agriculture Minister David Carter has described the company as the economy's biggest growth engine. But it hasn't been running smoothly. "Its performing okay," Mr Carter told Dairy Exporter. "But could it do better? Yes, definitely it could."

Special legislation was enacted in 2001 to merge Taranaki-based Kiwi Co-op and Waikato-based NZ Dairy Group with the Dairy Board. The mega company was given special treatment on the strength of expectations at that time. Revenue – we were assured – would burgeon by 15 per cent annually to reach $30 billion by 2011 and the company, like Finland's Nokia, would become a national champion.

But the cooperative structure has been a hobble and Fonterra can't get the capital it needs to fire on all cylinders. Dairy farmers have been reluctant to yield control of the ownership of their industry and to finance the company's capital needs through higher retentions from the milk payout. They scuttled a previous restructuring plan because it would have weakened their grip – they would have had a majority stake but a chunk of shares would have been traded publicly. Among the objections were that those shares could have been snapped up by foreign investors.

The company would have been exposed to the threat of a sudden rush of farmer-shareholders selling out and cashing up their shares. As things stand, some $600 million flows in and out of Fonterra's books annually as farmers redeem shares to match declines in milk production.

Moreover, the company can't do all it can for the economy. When the Government looked into why Fonterra was not performing to its maximum potential, Mr Carter said, it quickly identified the company had an issue with liquidity around capital. Accordingly we all should hope the proposals approved this week will help tackle the redemption risk and make the capital structure sufficiently robust.

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