Fonterra faces a very difficult period of farmer relationships as it navigates its annual results to be released this week and the annual shareholders’ meeting in early November.
Despite near-record revenue and profit, Fonterra directors and senior managers will not be warmly thanked and rewarded for the strong financial outcome of the 2022-23 season.
Two seasons of $9-plus payouts are forecast to be followed by $7 in 2023-24, which is insufficient to cover sharply increased farm working expenses and debt repayments.
During spring, the monthly wash-up payments for a forecast final $8.20/kg milksolids price plus a likely 45-48c dividend and the 50c capital return will quickly fade in the rear-view mirror.
In response, farmers usually turn to strongly worded annual meeting remits and protest voting in the election of directors.
This year, two-term director Brent Goldsack and one-term Cathy Quinn retire by rotation and have said they will run for re-election.
In mid-September any new candidates who have passed independent assessment will be known and later in the month non-assessed candidates may also join the contest.
When they address the troops, chair Peter McBride and chief executive Miles Hurrell will be able to claim success in meeting their 2021 strategy targets: 40-50% increase in operating profit, 9-10% return on capital, and $800 million distributed to shareholders.
But the milk price target of $6.50-$7.50/kg now looks to be hollow, under-cooked and unwelcome.
In FY2023, for the first time in more than 20 years, Fonterra delivered both a high milk price and a high dividend – indeed, what may be the second-highest dividend since the 59c in 2006-7.
But it will be paid on a $2.50 share price, giving a gross yield of nearly 20% – a direct result of the capital restructure, the new 3:1 minimum standard requirement and the restricted farmers-only share market.
Many farmers are now somewhat unwilling dry share players, holding many more than they would prefer.
Since the 50c capital return on August 17, Fonterra Shareholders Fund (FSF) unit prices have dropped 65c to sit around $3.20.
That signals more unease in the FSF unit market than in the much bigger Fonterra Co-operative Group (FCG) market, where the share price has dropped not much more than 20c.
Prospects of the share and unit prices regaining strength appear to be forlorn.
Two further issues will bring forward strong opinions from farmer-shareholders at the annual meeting.
McBride has announced a consultation on reducing the size of the board by two seats – one farmer-elected and one appointed director – from 11 down to nine.
The proposed structure would be six farmer-elected, with three-year terms and two positions for election each year, and three appointed directors.
Fonterra has also signalled the release of its carbon reduction requirements for milk supply and what farmers must do to comply.
McBride and Hurrell have navigated the stormy waters between the large 2018-19 loss and what is expected to be a 2022-23 record profit, while changing strategy and structure.
But in the face of strong head winds from China, they cannot expect plain sailing in the future.