Fonterra’s Capital Restructure

Written By: - Date published: 2:26 pm, December 7th, 2021 - 32 comments
Categories: business, Deep stuff, Economy, exports, farming - Tags:

Fonterra is in the middle of a big restructure of its capital. It is still the case given its dominance over us that where Milk Supertanker Fonterra goes, we go.

The Fonterra Annual General Meeting on Thursday has a fair bit riding on it, and the Minister of Agriculture Damien O’Connor and MPI know it.
(I’m only focusing on share ownership in this piece, not the economic and social and environmental footprint of Fonterra. For those who wish to chew over their broader strategy, it is here.

When Fonterra was legislated into existence 20 years ago, it took the simple and pragmatic approach of adopting the capital structure format used by its predecessors; farmer shareholders had to own one share for every kilo of milk solids they supplied.

If you wanted to supply Fonterra you had to buy shares from Fonterra, and if you chose to exit Fonterra would buy those shares back.

But what occurred was a tsunami of cash that pushed in and rolled out pretty fast.

The mass-irrigation boom happened particularly in Canterbury and Otago and since most of these new conversion farms had no choice but to supply Fonterra, way more shares were being bought than sold.

But then competitor businesses started up there and the milk price crashed in 2006-07, and each mid-Canterbury dairy farmer with an average 300,000 shares that walked off to the competitors was costing Fonterra an average of $1.35m in share redemptions each.

That made for massive instability on Fonterra to invest, which was also more broadly doing badly every way you looked at it.

So this is another major go at stabilising itself financially, after selling off nearly everything that stood up since 2018. The Chief Miles Hurrell is most certainly working to a long term plan.

The consultation with the farmer owners has been extensive this time around, which is positive.

For those interested in the detail of what is proposed here’s a quick summary.

Retaining local control of a much smaller but much more profitable Fonterra is very important to us all.

Fonterra itself says “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. Protecting a strong New Zealand farmer-owned Co-operative of scale is in all of New Zealand’s interests.”

Right now these moves feel optimistic: the milk solid price per kilo is heading for $9.00 and will sustain a South Island + Waikato + Taranaki boom through 2022. But we’re not in an agricultural stress test like we were a decade ago, which is where these capital-defensive proposals really matter.

The democratic thresholds to changing Fonterra’s capital structure are high: for the proposal to be approved, it would require 50% support from the Co-operative Council (which is made up of representatives elected by farmers), followed by 75% support from eligible farmers at this week’s AGM.

Fonterra’s voting thresholds, and its consultation requirements, are higher than anything our Parliament does. Given the impact on New Zealand as a whole, it is an important set of votes to watch.

Fonterra are pretty confident in the result coming up.

The interesting staging of this vote now means that the policy and political debate about its impact on Fonterra and the Dairy Industry Reform Act will play out in the first half of 2022.

Fonterra are aiming to have this all tidied up by June 1 2022. Not gunna.

In the note Fonterra put out yesterday, they are clear that “Government is not in a position to support DIRA changes to facilitate the proposal at this stage, but understands the Government was to work together to reach an outcome that works for both parties. Fonterra is confident there is a regulatory framework that would support the Flexible Shareholding structure.”

It’s smart politics for the Minister to first let Fonterra gain its owner shareholder mandate, before he steps in with a view on it in terms of the legislation. That stops the mess the last time Fonterra tried this in 2012. It’s also showing the government to have a more active role in Fonterra than before. Vital.

The likelihood that in the next 6 months this share ownership debate will spill over into the water reforms and the RMA reforms is high. Whether or not that’s pertinent to who owns what shares in Fonterra, more permanent policy scrutiny of Fonterra will pull the NZ politics of Fonterra more out into the open.

32 comments on “Fonterra’s Capital Restructure ”

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  1. Tiger Mountain 1
    7 December 2021 at 3:40 pm

    There is relative truth in “where Milk Supertanker Fonterra goes, we go”–but the dialectic is that it is always up for change, particularly as we are in the age of tipping points, some already passed, and others approaching.

    ADVANTAGE could appear to have delivered a TINA post, but the reality of eventual flattening, and shrinkage even! for the “Milk Powder Republic” is admitted in Fonterra’s own statements. The NZ Dairy Workers Union Te Runanga Wai U, in its November 2021 magazine, said “the national dairy herd is set to reduce by 15% over the next 5-10 years” as they looked at plans by corporate players for two new Waikato dairy factories in Ōtorohanga and Tokoroa.

    Fonterra knows the game is up and is rearranging things for the most profitable outcome regardless. Less water hogging, less ECAN debacles, less bloody nitrogen put on land in the first place perhaps.

    The overseas adventures in Mexico and South America and various other places and acquisitions etc. did not achieve international cut through or dominance as perhaps originally envisaged. It is a changed world people. I eat plant based burgers these days, and they are getting pretty damn good.

  2. Simbit 2
    7 December 2021 at 9:12 pm

    I saw 122 comments on the National party reshuffle and only 1 in this. Thought I'd try and redress the imbalance, picking up on the interplay of capital and labour noted above. Value can flip pretty quickly. I've had plant based burgers too, and will have more going forward. Someone told me of a joint that serves up cricket burgers. I'm in Canterbury and have a growing disdain for ECan, and the dairy sector. Years of mismanagement of strategic resources (water, soil, public support) put a key national earner at high risk. Ironically, and giving a nod to the 122 comments on the Queen's opposition, it may well be a National led govt that gets the hospital pass as global capitalists try and squeeze labor and the environment to breaking point.

  3. Blazer 3
    7 December 2021 at 9:22 pm

    Fonterra is an anathema to free markets.

    It is an attempt at monopoly…and is a failing construct.

    The cry was for 'value added'….then it wasn't…!

    Stick to the knitting…today lets produce bulk products in the most efficient manner.

    Hire international 'talent'….$40 million later ,Theo Spering departs after overseeing a billion or so in losses.

    Be surprised if it exists in 10 years.

    Plant based substitutes will devour this industry imo.

    • ghostwhowalksnz 3.1
      8 December 2021 at 9:17 am

      Why switch from milk produced from sunlight and grass and water to highly industralised synthetic plant based substitutes- hint it doesnt grow like that

      The dairy cows only to the works to make hamburger patties after their milking days are over

  4. vto 4
    8 December 2021 at 7:26 am

    If I might correct an incorrect assumption held by so very many New Zealanders about the size of dairy and agriculture and its effect on us… "where Milk Supertanker Fonterra goes, we go"

    Dairy is only 3.5% of our gdp

    Agriculture in total is only 5.5% of our gdp

    Industry on the other hand is 20%, services 65%, construction 5%

    Agriculture and dairy are not the behemoths we are told. In fact they could shrink substantially and we would be fine. In fact, like the disappearance of the foreign tourism, it may in fact be that we would be better off as those resources, people and money tied up in inefficient agri and dairy (low-paid workers etc) get re-tasked to more efficient and valuable activities.

    Imo 90% of agri should be canned (the 90% that gets exported). Imagine the boost to our environment. Imagine our recovered landscape. Imagine…

    I know… heresy… but lets look at the hard facts.

    Agriculture and dairy are way overblown. Waayyy overblown…

    • Ad 4.1
      8 December 2021 at 7:53 am

      This one business is still 80% of our dairy industry.

      Dairy contributes $7.8b to our GDP, comprising dairy farming $6b and dairy processing $1.8b.

      Dairy is our largest goods export sector at over $15b and rising.

      Dairy accounts for more than 1 in 4 goods export dollars coming into New Zealand. Yup 25% of our goods exported.

      Dairy export growth has averaged 7.2% per year over 26 years.

      Dairy exports are 200% more than the meat sector, and almost 4X as much as the wood products sector, and 9X bigger than the wine sector.

      Other sectors like export education and tourism have now just fallen away.

      The dairy sector employs over 40,000 of us: 27,500 on farm and 13,000 in processing. And dairy employment has grown more than 2X as fast as total employment at an average of 3.7% per year.

      The dairy sector accounts for 15% of Southland's economy, 11% of Waikato's economy, 12% of the West Coast (likely more now after tourism's collapse), and 8% of Taranaki's economy.

      And it is Fonterra that supports 80% of all of it.

      Just a few of the reasons we need a strong policy lens over it are well traversed here:
      https://www.productivity.govt.nz/assets/Inquiries/frontier-firms/a977484e51/The-dairy-sector-in-NZ-TDB-Advisory.pdf

      • ghostwhowalksnz 4.1.1
        8 December 2021 at 9:22 am

        Dairy processing only $1.8 bill ?

        Fonterra is a $20 bill revenue business ( incl both Cooperative and Ltd business)

        Even if you take the dairy farmers milk payments out of that ($13 bill as its a Cooperative ) still leaves $7 bill for the added value of processing not $1.8 bill

      • vto 4.1.2
        8 December 2021 at 9:58 am

        Thanks Ad, I understand all those other statistic, damn statistics and lies… as they say… and also that within the small dairy industry it is a heavyweight, but that is all relative. In the same way Fletchers proportion of the construction sector.

        but dairy is still only 3.5% of gdp.

        it is no bigger than anything else

        • Ad 4.1.2.1
          8 December 2021 at 10:29 am

          Wishing for a replacement to the dairy industry doesn't make it happen.

          And it isn't going to happen.

          The post is about Fonterra's ownership.

          • vto 4.1.2.1.1
            8 December 2021 at 3:30 pm

            Yes, sure, and I commented on your second sentence.

            One thing I always note to people about Fonterra ownership is that it is a full blown socialist model.. while most all farmers decry socialism… bahahahaha…

            talk about head in the sand

            if they can't understand the basics it is no wonder that they keep getting things wrong

            • ghostwhowalksnz 4.1.2.1.1.1
              8 December 2021 at 4:00 pm

              Good point. They all receive the same farm gate milk price wheter they are in same town as the milk plant or 75 km away.

              The type of ownership- a cooperative- I think predates the 'invention of socialism'

      • Patricia Bremner 4.1.3
        8 December 2021 at 10:19 am

        Both of you are right to a degree, but Ad, no bottom line for Dairy is included for environmental damage and contribution to climate change. That is looming, and what was the sector's reply? "tractors through towns" and cries of "Too many regulations too fast".
        Farming on marginal land is a real problem.
        Like Covid deniers we have some Farming practice deniers.

        • Ad 4.1.3.1
          8 December 2021 at 10:33 am

          The post doesn't deny any farming practise at all. I specified clearly what it was covering.

          It does point to Fonterra's ownership and the need for sustained policy engagement.

  5. Blazer 5
    8 December 2021 at 8:10 am

    We export' over 5billion annually to aussie banks!

    Dairy is 3.5% of GDP-property 42% (recent report).

    I was horrified to learn dairy could not survive without importing foreign,mainly Philipino workers!

    Surely there are young kiwis out there who would embrace farm work with decent pay.

    Christopher 7 said on Q&A,that he was not in favour of lowering herd numbers.

    The impact of this industry on our water ways and emmissions need more attention.

    • Ad 5.1
      8 December 2021 at 8:21 am

      Have you been to Southland recently?

      Dairy farm workers are on average the best paid farm workers.

      • Blazer 5.1.1
        8 December 2021 at 8:31 am

        I thought Southland was a problem area.

        Land not really suited, converted to dairy with huge irrigation systems.

        If farm workers are generally poorly paid,being the best paid of that sector ,doesn't really say much…at all.

        • Ad 5.1.1.1
          8 December 2021 at 8:40 am

          You sound a bit out of touch with what workers are paid here.

          Go down to Southland and ask them what the dairy industry means to them. Take a look around.

          • Blazer 5.1.1.1.1
            8 December 2021 at 8:53 am

            Well put me in touch…how much are they..paid?

            • Ad 5.1.1.1.1.1
              8 December 2021 at 10:28 am

              According to the New Zealand government website on dairy careers:

              – Dairy farm assistants get between $42k and $80k per year

              – Assistant dairy herd managers between $48k and $88k

              – Dairy herd managers $51k – $90k

              – Dairy farm managers $61k – $160k

              – Operations managers for multiple farms $66k to $160k

              – Sharemilkers are the next step above that

              – Then there's farmers with herds … which is where the discussion about Fonterra shares comes in

              Dairy Farmer (careers.govt.nz)

              • KJT …
                8 December 2021 at 12:19 pm

                Until recently local youngsters were competing with 15 Philippines per cow shed, for working 70 hours a week at the minimum wage for 40 hours.

                Don't even get me started in the real life stories I have about how local kids were treated by farm employers. I have several pages of them.

                • Ad …
                  8 December 2021 at 12:21 pm

                  Agree. Not that I would dare call something so harmful as COVID an economic blessing in disguise.

                  • KJT …
                    8 December 2021 at 7:13 pm

                    I had to bite my tongue on my thoughts of "good on them" when one of the more exploitative local cockies was moaning about his Phillipino workers leaving for "greener pastures" elsewhere in NZ. When the requirements to stay with the same employer were relaxed.

              • Blazer …
                8 December 2021 at 3:42 pm

                So entry level is just over $20 an hour @40 hours a week.-$807 b4 tax weekly.

              • pat …
                8 December 2021 at 7:28 pm

                As KJT says..when looking at those declared salaries start asking the hard questions….how many hours, what rotation. how much charged for accomodation, etc?

                Theres a very good reason why the bulk of dairy farm labour are migrants

          • Hunter Thompson II 5.1.1.1.2
            8 December 2021 at 10:11 am

            For a reality check, look at the excellent TV doco "Milk and Money" by Baz Macdonald (it's on demand and Facebook).

            Some real issues there, Southland included, which the blarney over Three Waters has obscured.

            • ghostwhowalksnz 5.1.1.1.2.1
              8 December 2021 at 10:52 am

              3 waters excludes the '4th water' which is streams and rivers in rural areas.

                • ghostwhowalksnz …
                  8 December 2021 at 3:58 pm

                  I would think a river or stream isnt a 'stormwater system'

                  Stormwater systems are more complex than drinking water or wastewater systems. Most stormwater systems are made up of both a dedicated reticulated stormwater network and above ground, secondary, and overland flow paths.

                  I would see it as the man made systems, not the natural ones, but the stormwater would end up in streams – rivers-bays but isnt owned by a council

  6. Ian 6
    10 December 2021 at 9:10 pm

    A lot of you guys need to escape your echo chamber and learn some facts about Fonterra and the farmer shareholders that own it.