By Peter McBride, chair of Fonterra
Dairy farmers are doing it tough right now as we face into a declining milk price environment that is below break-even for many. Spurious suggestions that their co-op might fall victim to a corporate takeover creates extra anxiety that farmers just don’t need right now.
Fonterra’s constitution provides several safeguards that ensure farmer ownership and control of our co-op. Protecting this fundamental principle was central to our conversations when designing the Flexible Shareholding capital structure.
To acquire shares in the co-op you need to be a landowner/supplier or an associated shareholder. There are safeguards and limitations in place constitutionally around consolidation risk, notwithstanding the significant capital required.
Voting rights for farmers are limited to their milk supply, and individual shareholdings are capped at 5% of total shares on issue. Changing this would need the support of the board, the Fonterra Co-operative Council and 75% of shareholders.
In addition, it’s no longer possible to convert co-op shares into units. The aggregate threshold and cap for the Fonterra Shareholders’ Fund were reduced as part of the Flexible Shareholding capital structure. The cap is now 10% and it is currently sitting at 6.7% of total shares on issue.
As well as the constitutional change, the implications under New Zealand’s regulatory framework – including the Dairy Industry Restructuring Act – would also need to be considered.
Aside from the constitutional and regulatory framework, the co-op’s current strong financial position and performance is also a significant barrier for any corporate to overcome. The improvements to our key balance sheet metrics have continued this year.
Our Flexible Shareholding capital structure has only been in place since March. It’s working broadly as expected and we are comfortable with the liquidity in the market – which we continue to support.
There is a misconception that Fonterra is active in the market to “prop up the share price”. Following the transition to the Flexible Shareholding structure, Fonterra implemented market maker arrangements to support liquidity in the Fonterra Shareholders’ Market.
We also have the ability to buy back shares as part of our ongoing capital management programme, where we see it as the best use of capital.
Our share price has come down. This was a well-signalled consequence of moving to a restricted market and communicated clearly before shareholders voted to support the changes. There has also been a share price impact as a result of the recent capital return. Over time we expect that the price will reflect the co-op’s financial performance, and the value farmers see in that. Ultimately farmers will determine the value of the shares, given farmers can only buy and sell to each other.
I hope that clears things up for farmers, and the many other Kiwis who take a keen interest in our co-op.
Despite the very real challenges the industry faces this season, the longer term outlook for NZ dairy remains positive. The world wants sustainable NZ milk. Fonterra is in a strong position to meet this demand and our current balance sheet gives us a lot of options to create more value – which is exciting for our future.