Fonterra today (18 September) laid out plans to secure more funding from its farmer-members and shore up the company’s balance sheet.
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The New Zealand dairy giant, the world’s largest dairy exporter, said its three-step plan should “take care” of its “capital needs” for the next five years – and, crucially, allow farmers to keep 100% ownership of the business.
A previous move from Fonterra to restructure the business was rejected by farmers two years ago. The co-op’s members resisted moves from Fonterra’s management to divide the co-operative in two and float its business operations as a separate company.
“Many of our shareholders have made it clear that they want to retain 100% farmer control and ownership of their co-operative,” said Fonterra chairman Sir Henry van der Heyden. “They have also indicated they are prepared to support Fonterra’s ongoing growth by providing additional capital to fund profitable business opportunities.”
He added: “The options we are discussing with farmers would strengthen the capital structure and make Fonterra more adaptable and competitive in the international marketplace. They seek to encourage farmers to maintain or increase their equity in the Co-operative.”
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By GlobalDataSir Henry’s latest three-step plan, which needs the backing of 75% of farmer votes, would Fonterra’s members to hold shares up to 120% of their milk production. For most farmers, Fonterra said, the current limit is closer to 100%. The company added that there would be enhanced incentives for them to hold shares even if their production falls.
The Fonterra chairman said the proposal would help reduce the company’s “redemption risk”, which occurs because the co-op’s share levels are related to milk production and the business is responsible for buying shares back off farmers when they want to redeem them.
After milk production fell during the 2007/08 drought, Fonterra had to pay out NZ$742m of equity to farmers via redemptions.
“To be successful and achieve the best possible payout for farmers, Fonterra can’t afford to have hundreds of millions of dollars washing in and out of the balance sheet every time milk production fluctuates, for whatever reason,” Sir Henry said.
A second proposal would see share ownership restricted to farmers only. Fonterra’s farmer shareholders will be consulted on the first two steps at meetings over the next fortnight and in October. The plans could then be put to the vote at Fonterra’s annual meeting in November.
If the first two steps are approved, a third proposal – where farmers buy and sell shares among themselves, rather then transacting through the co-operative – could be discussed and voted on next year, with implementation possibly in 2011.
