The 2001 decision to merge two large co-operative processors and the Dairy Board to create Fonterra - also a co-operative - progressed only after exhaustive analysis and debate, and even then it did not please everyone. So it is not surprising the current debate by Fonterra shareholders to change its capital structure which, among other steps, will allow non-farmer shareholders to hold non-voting investment units in Fonterra via a separate fund, has attracted fierce scrutiny.
Farmers have traditionally embraced co-operative ownership.
The two largest meat companies, kiwifruit growers and some of the largest farm servicing companies are all owned by those who use their services. But co-operatives struggle to attract new capital when compared with private or publicly owned businesses, and they constantly face the risk of redemption - of owners exiting and cashing in their shares. This latter issue is the primary driver behind Fonterra introducing Trading Among Farmers (TAF). Every Fonterra farmer-supplier must own one share for each kilogram of milksolids supplied. This was amended recently to provide some flexibility and reduce the legal requirement for farmers to buy extra shares from the co-operative in a bumper production year or redeem them in a poor year. The risk was graphically illustrated during the 2007-08 drought when the subsequent fall in milk production meant Fonterra paid $742 million of share capital to farmers through redemptions.
The TAF proposal would mean the establishment of a Fonterra Shareholders' Market, a private market through which farmer-shareholders only can buy and sell shares between themselves to meet their co-operative obligations. The contentious part of TAF is the establishment of a Fonterra Shareholders' Fund, which the Fonterra board says will provide farmer-shareholders with liquidity and flexibility by allowing shareholders to sell the economic rights in a portion of their shares to the fund. The fund will then raise money to pay farmer shareholders by selling investment units in the fund to investors. It is expected that investors such as sharemilkers, retired farmers and offshore Fonterra suppliers, will buy the units, but public investors and institutions can also participate.
The co-operative has grappled with issues of capital structure since its inception, and has tried to address these since 2007, a process which has taught the board that farmers will not accept anything less than 100% control and ownership. Some critics are not convinced TAF will preserve those bottom lines, even though their protests appear to lack hard evidence to back up those concerns.
They fear Fonterra may be conflicted between the need to appease non-farmer investors with the share dividend at the expense of the milk price they pay to farmers.
Part of the process has been to create a transparent milk-price setting process, a system which has been approved by a number of watchdog groups, including the Commerce Commission. To tamper with it to increase the dividend payout on investments would not only be illegal, but also unethical.
Critics also talk about losing control of the co-operative to outside investors, despite provisions and safeguards restricting their interest to that of a minority passive investor. They will have no voting rights in the co-operative and, given Fonterra has 10,500 farmer shareholders, logically they will not have any influence.
Fonterra's independent watchdog, the Fonterra Shareholders' Council, is supporting TAF, but the debate has come at the cost of the resignation of its chairman Simon Couper, who could not support it.
Despite his opposition, it is widely acknowledged nearly 90% of the 35-member council support the proposal.
It is understandable Fonterra chairman Henry van der Heyden wants more than just the required majority support for TAF from shareholders when they vote next week; he wants this prolonged debate to come to an end. So he should: it is for the good of the economy that our biggest export earner has no more distractions, and that it focuses on its core business of exporting dairy products.
