Fonterra members to vote on change to capital structure

The changes go before the dairy co-op’s members after its AGM on 9 December

New Zealand dairy co-op Fonterra is to hold a shareholder vote on the change to its capital structure, which would give share milkers and contractors the option of purchasing shares.

Fonterra says the move, which has already passed a required 50% vote by its co-operative council, would give farmers greater financial flexibility and better enable the co-op’s strategy. 

The plan requires 75% support among voting shareholders to pass, with a vote after its AGM on 9 December.

Chairman Peter McBride says the board and management are united in the belief that the flexible shareholding structure is the best option, and shareholder feedback has shown strong support for the changes.

“The board is unanimously recommending the changes to our capital structure to put us in the best position to deliver the value outlined in the strategy and protect farmer ownership and control of our co-op,” he said.

“Our strategy is focused on New Zealand milk and our future success relies on our ability to maintain a sustainable milk supply in an increasingly competitive environment, and one that is changing rapidly due to factors such as environmental pressures, new regulations and alternative land uses.

“We see total New Zealand milk supply as likely to decline, or flat at best. Our share of that decline depends on the actions we take with our capital structure, performance, productivity and sustainability. If we do nothing, we are likely to see around 12-20% decline by 2030 based on the scenarios we have modelled.”

He added: “Protecting a strong New Zealand farmer-owned co-operative of scale is in all of New Zealand’s interests.

“Fonterra’s scale efficiencies deliver value to all of our New Zealand communities. Our milk price sets the benchmark for prices kiwi dairy farmers are paid for their milk, so even farmers who don’t supply the co-operative benefit from it.

“Our scale efficiencies also keep our manufacturing sites efficiently utilised and increases our ability to invest in on-farm support services, innovation, new markets and product development – all of which create value for New Zealand in terms of milk price and profits returned to regions, export performance, employment, environmental performance, and community development.”

The changes, as stated by Fonterra, are:

  • The introduction of thresholds to support the alignment of share ownership and milk supply, and reflect Fonterra’s intention that the total number of shares on issue in the Co-op is within +/- 15% of total milk supply, and that the proportion of shares held by ceased suppliers is less than 25% of the shares in the Co-op
  • The way dry shares are allocated to associated shareholders (sharemilkers, contract milkers and farm lessors) has been simplified to make it easier for them to apply to hold dry shares
  • The overall limit on the size of the Fund has been reduced from 20% to 10% of total shares on issue, rather than having a total ban on any further shares being exchanged into units. This recognises that the Fund size, which is currently around 6.7% of total shares on issue, could change from time to time subject to the overall limit. Shares will still not be able to be exchanged into units on a day-to-day basis, and the Board retains its current rights to regulate this process.  

“We would like to thank the thousands of farmers who gave us their time and ideas as part of the consultation process,” said Mr McBride. “Their comprehensive feedback has helped us shape this proposal into a model which we believe addresses the broad, and at times, conflicting views within our ownership base.”

The details of the proposal and how to vote will be included in the notice of special meeting, which will be released to Fonterra’s farmers the day before the voting period opens on 18 November. The special meeting will be held immediately after the conclusion of Fonterra’s annual meeting on Thursday 9 December.

Fonterra says a successful farmer vote would not take effect until the board is satisfied that any steps necessary for implementation have been, or will be, completed. Fonterra is aiming for 1 June 2022, but adds that it needs to work with the government on what the changes might mean under the Dairy Industry Restructuring Act (DIRA).

The government is not in a position to support DIRA changes to facilitate the proposal at this stage, says Fonterra, but it wants wants to work with the co-op on an outcome that works for both parties.

“Fonterra is confident there is a regulatory framework that would support the flexible shareholding structure,” the co-op added.

If the vote is not passed, Fonterra says it will engage with shareholders about next steps and the temporary cap on the size of the fund is expected to remain in effect at least until then.