Fonterra starts consultation on capital structure options
6 May 2021
Fonterra starts consultation on capital structure options
Today Fonterra is starting a consultation process to seek farmer feedback on potential options to change
its capital structure that could give farmers greater financial flexibility.
To allow its farmers to have open conversations and consider all options during consultation, the
Co-operative is temporarily capping the size of the Fonterra Shareholders’ Fund (the Fund) by suspending
shares in the Fonterra Shareholders’ Market (FSM) from being exchanged into units in the Fund.
This temporary cap will be effective once the current trading halt is lifted when the market opens tomorrow
and will remain throughout the consultation process.
Chairman Peter McBride says the capital structure review seeks to ensure the sustainability of the
Co-operative into the future.
“The Co-op’s future financial sustainability relies heavily on our ability to maintain a sustainable New
Zealand milk supply and protect farmer ownership and control.
“The decisions we’ve already taken in response to the findings of the review – like temporarily capping the
size of the Fund – haven’t been made lightly. We appreciate they will have come as a surprise, but they
are necessary to keep all our options open while the Co-op’s farmer shareholders have a free and frank
conversation about our capital structure,” says Mr McBride.
Some of the options the Co-operative is asking its farmers to consider include buying back the Fund. If the
temporary cap was not in place, anyone holding ‘dry shares’ – those shares held in excess of the ‘wet
share’ requirement linked to milk production – would have been able to exchange them into units in the
Fund during consultation. This could have more than doubled the size of the Fund and made the option of
buying it back unaffordable in the context of the Co-operative’s current balance sheet targets.
Capital structure options the Co-op is consulting on
The Fonterra Board has spent a significant amount of time looking at a wide range of options, including
staying with the current structure. Some of the alternative structures they’ve considered include:
- dual share structures, which would move from the current single Co-operative share to a
compulsory supply share and a separate non-compulsory investment share
- unshared supply structures
- a traditional nominal share structure
- a split co-operative model
All options are explained in the attached booklet, which all Fonterra farmers will be receiving as part of the
consultation.
Fonterra Co-operative Group
Page 2
After its analysis to date, and to help give the conversations with farmers some structure, the Board has
put forward a preferred option – a “Reduced Share Standard with either No Fund or a Capped Fund.”
“We believe the best option for our Co-op is to move to a structure that reduces the number of shares a
farmer would be required to have and either removes the Fund or caps it from growing further, to protect
farmer ownership and control,” says Mr McBride.
Under this option, the minimum requirement for farmer owners would be one share for every four kgMS
supplied to the Co-op, compared with the current requirement of one share for every kgMS supplied. At
the other end of the scale, farmers could hold shares up to a maximum of four times their milk supply. But
farmers will be encouraged to share their views on these and other features.
“This would make it easier for new farmers to join the Co-op and give more flexibility to existing farmers
who may want to free up capital or who are working through succession.
“A key outcome of this change is that shares would be bought and sold between farmers in a farmer-only
market.
“I want to be clear that these changes could impact the price at which shares in our Co-op are traded, and
there may not be as much liquidity in the market. Ultimately the price for farmers’ shares would be
determined by the performance of the Co-op and trading between farmers.
“We believe this is a more sustainable proposition over the longer term than the alternatives we are
confronted with.
“This is the Board’s current thinking, but we are open minded about adjusting that direction based on
farmer feedback on any of the options. We want to hear from as many of our farmers as possible. I
strongly encourage all farmers to consider the information provided and participate in the consultation
process that started today and continues over the coming months.”
Why the Co-op is looking at alternative capital structure options
Fonterra says the environment it is operating in has changed a lot over the last ten years. The
Co-operative’s current structure was put in place when milk supply was growing rapidly in New Zealand.
It now needs to be prepared for flat or potentially declining milk supply as a result of factors such as
climate change impacts, regulatory changes, and alternative land uses.
“Our Co-op’s financial performance will always be the main determinant of our share of New Zealand milk.
But we also know that a more flexible capital structure, that caters for the diversity and different
aspirations within our Co-op, would support a sustainable future milk supply. This is critical for us to
deliver our strategy, which prioritises New Zealand milk.”
Fonterra says declining milk volumes or more flexibility for farmers’ shareholding requirements could
cause the Fund size to grow significantly. That would mean the thresholds that were put in
place to help protect farmer ownership and control could be exceeded within the next few seasons.
“To stay within the Fund size thresholds, our Co-op would need to take action – such as buying back
shares or units or increasing the thresholds to allow a greater degree of external investment. We don’t
think either of these are ideal outcomes.
“Buy-backs create an uncertain demand on our capital, potentially impacting our ability to invest in
strategy and growth. Under the scenarios that we’ve modelled, buy-backs could cost shareholders up to
$1.2 billion over the next ten seasons.”
Next steps
Over the coming months, the Co-operative’s farmers will have the chance to share their views through a
series of meetings, webinars and other opportunities – and if the appetite for change remains – the Board
Fonterra Co-operative Group
Page 3
will do further work to refine the preferred option or options and have a second round of consultation. If
the Board decides to seek change to the Co-operative’s capital structure, it would likely aim for a
farmer vote around the time of the Annual Meeting in November and the approval of 75% of votes from
voting farmers would be required.
If the preferred outcome is to buy back the Fund, it would also require the approval of 75% of votes from
voting unit holders.
As some aspects of Fonterra’s current capital structure are reflected in the Dairy Industry Restructuring
Act 2001 (DIRA), any vote is likely to be conditional on any necessary changes to legislation being
passed. The DIRA enabled Fonterra to be formed so that an efficient co-operative of scale could lead
New Zealand into global markets. The value Fonterra creates is returned to regional New Zealand, where
it plays a strong role helping to sustain local communities and enhance their wellbeing.
“I appreciate there is a real sense of optimism in the Co-op with our improving financial performance and
how we are travelling generally.
“But the issues raised through this review need to be addressed early. Waiting for the problem to be at our
feet will limit our options and likely increase the cost of addressing them, at the expense of future
opportunities for us,” adds Mr McBride.
Other notes of importance
• Share Standard compliance obligations for the 2021/22 season are now temporarily on hold for all
supplying farmers holding a minimum of 1,000 shares and exiting farmers that are selling shares
over three seasons in accordance with the Constitution – until a date to be advised. This is due to
the uncertainty around what changes, if any, may occur to the Co-operative’s capital structure.
The date for resuming Share Standard compliance obligations will not be earlier than six months
after the Co-operative has implemented a new capital structure or made an announcement that
the capital structure review is not proceeding for the time being.
• The formal Compliance Date for the 2021/22 season has been set as 20 April 2022, which is
consistent with previous seasons. However, as explained above, farmers holding a minimum of
1,000 shares will not be required to comply with the Share Standard for the 2021/22 season until
a date to be advised.
• Compliance obligations are also temporarily on hold for those farmers who have not yet met their
Share Standard compliance obligations for the current 2020/21 season. This is so that no farmers
are required to trade for compliance purposes during the temporary cap, until a date to be
advised.
• For contract suppliers, the purchase of units under the Contract Fee for Units Trust will also be
put on hold while the temporary cap is in place or until such date as the Board advises.
• Shares in the FSM still have the same core rights as they did before the temporary cap. This
includes rights to receive any dividends.
• During the temporary cap, the prices for units in the Fund and shares in the FSM may not be as
closely aligned as they have been to date.
• Even if a price difference does emerge, given that no additional shares have been issued, the
Co-operative’s value on a per share basis has not been diluted.
• Also, because the compliance obligations for farmers holding at least 1,000 shares have been put
on hold, there may be lower levels of trading. However, farmers will still be free to buy and sell
shares in the FSM. The market maker, or registered volume provider, that has been active in
making bids and offers on a minimum number of shares in the FSM since our current structure
Fonterra Co-operative Group
Page 4
was implemented will continue to operate in the FSM, but the share price could move more on
small volumes of trading in the FSM.
• Anyone holding units in the Fund, which may include farmers, will be free to continue buying and
selling units on the NZX or ASX given the temporary cap only applies to the exchange of shares in
the FSM into units.
Further information is available at www.fonterra.com/capitalstructure
Attachments
• Presentation
• Consultation Booklet
• Frequently Asked Questions
-ENDS-
For further information contact:
Fonterra Communications
24-hour media line
Phone: +64 21 507 072
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2
3
•
•
•
•
•
•
Proceed with Preferred
Option
(if change is recommended, then
this would likely include a
shareholder vote)
Further Regional
Meetings
Review and
address
feedback
Refine options
Further
Consultation
Director
Meetings
4
6.5%16.6%
$525m*$1,330m*
*Based on a $5 share price; Actual Fund Size and Potential Fund Size are as at 31 March 2021
To create superior value
forourcustomers and
our Co-operative
To do what is right for the
longterm good and meet
consumer and community needs
Unlock greater value from
ourscale efficiency and
focus on execution
8
VolumeValue
Global Milk Pools
Prioritise New Zealand Milk
+ complementary components
Maximum volume into consumerFocus on key categories to deliver superior value
Dairy onlySupplement with non-dairy where makes sense
Partner with cash investmentsPartner with IP and skills and lift R&D
Debt funded growthConservative balance sheet
Global giant with HQ
in New Zealand
Celebrate Aotearoa New Zealand
and take it to the world
Invest widely based on
aggressive growth plans
Divest non-core businesses and
focus where we have a competitive advantage
9
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
New Zealand Milk Supply
NZ Milk Supply Scenario
Fonterra Milk Supply
Scenario 1
Scenario 2
10
Source: NZ Milk Supply: Dairy NZ –New Zealand Dairy Statistics 2019-20,Summary of milk production statistics for the last 35 seasons
Significant and sustained expansion of dairy
We need to be
prepared for flat to
declining NZ milk
Flattening
11
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
Supply CorporateSupply Fonterra
Shares
Cows
Land
Source: DairyNZEconomic Survey 2018/19
Based on a $5 share price
12
•Under the current structure, dry shares can
be exchanged into units in the Fund at any
time
•When TAF was set up we created
thresholds to protect farmer ownership and
control
•We are approaching some of those
thresholds today
•Declining milk or more flexibility for farmers
could cause us to exceed those thresholds
*Not to scale
13
-
50
100
150
200
250
2020/212021/222022/232023/242024/252025/262026/272027/282028/292029/302030/31
Dry Shares (m)
Scenario 1Scenario 2
•
•
•
•
•
17
18
•Of the options that we reviewed, Reduced
Share Standard with either No Fund or
Capped Fund best met our three criteria
•This is because it:
•Provides capital flexibility for farmers
•Secures farmer ownership by removing
or capping the Fund
•Maintains balance sheet strength
19
Limited flexibilityIncreased flexibility
1:1 minimum share standard1:4 minimum share standard
Maximum share ownership 2x supplyMaximum share ownership 4x supply
Share/Unit exchangeabilityCapped Fund or No Fund
Share price set in public and farmer marketsShare price set in farmer-only market
1 vote per 1000 kgMSsupplied backed by
shares
1 vote per 1000 kgMS supplied backed by
shares
20
•
•
•
•
•
•
•
21
Fund size is permanently cappedFund is removed
No offer is made to buy back the FundAn offer is made to buy back the Fund
No unit holder vote required
Requires approval of 75% of unit holders entitled to
vote and voting
No capital allocation requiredCapital is allocated to buy back the Fund
FSF and FSM both operate but independentlyOnly FSM operates
Shares and units could trade at different pricesShare price only in the farmer-only market
23
•
•
•
•
•
•
Proceed with Preferred
Option
(if change is recommended, then
this would likely include a
shareholder vote)
Further Regional
Meetings
Review and
address
feedback
Refine options
Further
Consultation
Director
Meetings
25
27
Does the
structure
support our
ability to attract
and retain high
quality,
sustainable milk
and provide
financial
flexibility for
farmers?
Does the
structure align
incentives
between
shareholders,
unitholders and
management,
to maximise
value?
Is the transition
to a potential
new structure
affordable,
achievable and
fair to
unitholders and
farmer
shareholders?
Is the structure
simple to
understand and
simple to
operate for
both farmers
and the Co-
operative?
Does the
structure
manage
redemption risk
and economic
shocks in a way
that makes the
Co-operative
resilient?
Does the
structure
preserve
balance sheet
strength and
provide access
to capital at a
reasonable
cost in the
future?
Does the
structure
protect value
for current Co-
op members
and allow
farmers to
transact their
membership /
shareholding in
a way that is
fair?
Does the
structure
preserve farmer
ownership and
control of the
Co-operative for
the long term?
Link 5
Link 4Link 3Link 2Link 1Fonterra Capital Structure Review
Slide #
28
Further
development
of options
Farmer
survey
Problems to
Solve &
Principles
Detailed analysis
of options, trade-
offs, risk and
benefits
Research into
Co-operatives
around the world
Proceed with
Preferred Option
(if change is
recommended, then this
would likely include a
shareholder vote)
Further Regional
Meetings
Review and
address
feedback
Refine options
Further
Consultation
Director
Meetings
29
•
•
•
•
•
30
•
•
•
•
•
31
•
•
•
32
•
•
•
•
•
33
0%
25%
50%
75%
100%
20172030 Target2050 Target
Methane Emission (2017 Eqvui)
NZ Biogenic Methane Emission Targets
(2017 baseline)
3
Target Range
-
500
1,000
1,500
2,000
kg
MS
(
m
)
New Zealand and Fonterra Milk Supply
1
Fonterra Milk SupplyNew Zealand Milk Supply
TAF
Source: 1) Dairy NZ –New Zealand Dairy Statistics 2019-20,Summary of milk production statistics for the last 35 seasons
2) Dairy NZ –New Zealand Dairy Statistics 2019-20,Summary of herd statistics since 1975/76
3) Dairy NZ -DairyNZ'sposition on the Zero Carbon Bill
-50,000
0
50,000
100,000
150,000
200,000
Hectares
Change in Total NZ Dairy Hectares
2
2008/9 to
2011/12
2012/13 to
2015/16
2016/17 to
2019/20
34
FONTERRA FARMERSFUND INVESTORS
Shares
Custodian
Units
---
Capital
Structure
Consultation
2021
A strong Co-op benefits
farmers and New Zealand
It’s good to remember why we’re a Co-op in the first place.
First and foremost, the role of a
co-operative is to give farmers control
of their own destiny. Because we own
and control Fonterra, we know that our
Co-op will collect our milk and work
hard to ensure we receive the best
possible price for it. Maximising overall
wealth of our shareholders is at the core
of our Co-op’s purpose.
Sharing the investment in our value
chain between us farmers and having
confidence that our milk is going to
be picked up means we can have the
certainty to invest in our individual
farming businesses. This is an important
reason behind the efficiency and
productivity that has given us some
of the advantages we enjoy today –
advantages that benefit all Fonterra
shareholders. We believe that farmers
are worse off in countries where there
is no strong co-operative. Corporate
processors look at milk as an input
cost, and over the long run they are
incentivised to reduce the price they pay
for milk to maximise corporate profits.
Having a strong farmer-owned
co-operative in our dairy industry
is important to every New Zealand
dairy farmer, and for the country
as a whole.
Specific legislation enabled Fonterra
to be formed so that an efficient
co-operative of scale could lead New
Zealand into global markets. Working
together as a Co-op means we are
connected to local communities around
New Zealand. It enables our efficiency
– from behind the farm gate through
to our manufacturing operations and
beyond – and supports innovation.
The value we create is then returned
to regional New Zealand, where it
plays a strong role helping to sustain
local communities and enhance
their wellbeing.
For every dollar we earn as farmers,
we spend almost 50 cents in our
communities. 2020/21 looks set to
be another season that our Co-op
contributes more than $11 billion into
the New Zealand economy through milk
price payments.
Our milk price sets a benchmark in
New Zealand, so even those who don’t
supply the Co-op benefit from it.
Fonterra and Tatua are the two main
dairy co-operatives left here. Many
other milk processing companies are,
or have become, fully or substantially
owned by offshore interests.
It’s critical to protect and build on
what we’ve got – for the benefit of all
Fonterra shareholders. Ultimately, a
strong and sustainable Fonterra leads
to a stronger and more sustainable
Aotearoa New Zealand.
What’s in this booklet
1ON BEHALF OF THE BOARD 2
2WHY WE’RE PROPOSING CHANGES4
3THE PREFERRED OPTION AND WHAT IT WOULD MEAN FOR US6
Reduced Share Standard with No Fund or Capped Fund
How it could work
Comparing the preferred option to our current structure
Key things to consider
Why this is the preferred option
7
9
10
12
14
4HOW WE GOT TO THIS POINT16
A brief history of our capital structure
A recap of our strategy
How we went about our capital structure review
The detailed findings of the review
16
18
20
21
5THE OTHER OPTIONS CONSIDERED DURING THE REVIEW24
6WHERE TO FROM HERE 30
The consultation process and timeline of next steps
How to get more information and have your say
How to contact us
30
31
31
7GLOSSARY32
This booklet is for consultation purposes only.
The options are not yet fully developed, and you
are not being asked to vote on anything at this
stage. If the result of the consultation is that
there is sufficient support for a change to our
capital structure, then you will have a chance to
vote on that change and you will receive all the
documents needed to understand and assess
the details before you are asked to vote.
This booklet is not an offer of financial
products (e.g. shares), and no such offer is
currently intended. No money is being sought
from shareholders, and financial products
cannot currently be applied for or acquired
under any of the options in this booklet. If an
offer of financial products is made as part of
a change to our capital structure, it would be
made in accordance with the applicable legal
requirements, including the Financial Markets
Conduct Act 2013.
Some of the information set out in this booklet
relates to future matters that are subject
to uncertainties. The inclusion of forward-
looking information should not be regarded
as a representation or warranty by Fonterra or
any other person that those forward-looking
statements will be achieved or that the
assumptions underlying any forward-looking
statements will in fact be correct. Actual
outcomes may vary materially from those
suggested or implied.
If you have any questions about the options
being consulted on or would like to clarify your
understanding of anything in this booklet,
see Section 6 for who you can contact. For
any questions about your own financial
circumstances or your holding of shares or
units, please contact your accountant, lawyer,
financial advisor or other rural professional.
This booklet is addressed to Fonterra’s
farmer owners, but the interests of other
stakeholders (including the Custodian and the
Manager of the Fonterra Shareholders’ Fund)
have been, and will continue to be, considered
as the options have been and continue to be
developed, and these parties will be consulted
as appropriate.
Some of the dollar values in this booklet
assume (for illustrative purposes) a share price
of $5.00. This is not a representation as to the
future price of Fonterra shares. Over the period
of 90 days ending 30 April 2021, the share
price has varied above and below that level.
Dear Farmer Shareholders,
I’d like to start by acknowledging that the
temporary cap on the size of the Fonterra
Shareholders’ Fund will have come as a
surprise. We did not make that decision
lightly. It is necessary to keep all of our
potential options for change open while
we have a free and frank conversation
as owners.
Over the past 24 months, our Co-op
has been undergoing a cultural and
strategic transformation. Change was
needed. If we want Fonterra to continue
supporting our families’ livelihoods for
another 150 years, we have to keep
evolving it, while staying true to our
Co-operative Principles.
1.
On behalf of the Board
Our Co-op has refocused on delivering
sustainable value back to New Zealand.
We do that through a strategy designed
to optimise the value of our New Zealand
milk, using innovation, sustainability, and
efficiency to deliver products that are
orientated to what our customers and
consumers value.
Alongside that refreshed strategy, the
Board has spent a significant amount
of time reviewing our capital structure.
Both of these pieces of work are founded
on our belief that New Zealand milk
volumes will likely be flat or declining in
the long term as a result of environmental
and other regulatory changes, and
alternative land uses.
2
CAPITAL STRUCTURE CONSULTATION 2021
Our Co-op’s financial performance will
always be the main determinant of our
share of that New Zealand milk. But we
also know that our rigid compulsory
capital structure makes it difficult for
new farmers to join and is a key factor
in farmers’ decisions to leave. A more
flexible capital structure that caters for
the diversity and different aspirations
within our Co-op would be valued by
farmers and support a sustainable
future milk supply.
Within that context, our review has found
that our current capital structure could
create challenges over time.
1. Under the current structure if milk
volumes reduce, the number of
dry shares will increase and could
exceed the thresholds that were
put in place to protect our farmer
ownership and control. Our Co-op
would need to take action to stay
within these thresholds – such as
buying back shares or units. Buy-
backs could impact our Co-op’s
balance sheet and investment in
new opportunities that increase
performance. Conceivably, buying
back shares or units to ensure that we
retain ownership and control of the
Co-op could cost shareholders up to
$1.2 billion over the next ten seasons.
2. An alternative to buy-backs would
be to increase the thresholds for the
Fund size, to allow a greater degree
of external investment.
We don’t think either of these are ideal
outcomes, so we have been looking at
other options for change. Exactly what
that change could look like is what we
want to consult with you on now.
To give those conversations some
structure, the Board has shared its
current thinking. It is detailed in
Section 3 of this booklet.
We have arrived at this point after
reviewing a wide range of capital
structure options from co-operatives
around the world – both within and
outside the dairy sector – as well as
options to evolve our current structure.
Throughout the process we have focussed
on addressing three key issues:
1. Maintaining financial sustainability
of our Co-op
2. Protection of farmer ownership
and control
3. Flexibility for farmers’ invested
capital that helps farmers to be part
of our Co-op at every stage of the
farming lifecycle and ensures we
maintain a sustainable milk supply.
Having narrowed down the options, we
believe the best option for our Co-op
is to move to a structure that reduces
the share standard so you have greater
flexibility, and either removes the Fund
or caps the Fund from growing further
to protect our farmer ownership and
control. We’re referring to this as a
“Reduced Share Standard” with either
“No Fund” or a “Capped Fund”.
Under this option, the Fund would either
need to be bought back and removed
from our capital structure (No Fund) or
remain in the structure but with no ability
to exchange shares into units so the Fund
size would be capped (Capped Fund).
A key outcome of this change is that
shares would be bought and sold
between farmers in a farmer-only market.
I want to be clear with you that we expect
this change to impact the price at which
shares in our Co-op are traded, and that
there may not be as much liquidity in
the market.
Ultimately, the price of our shares would
be determined by the performance of our
Co-op and trading between us farmers.
Currently our share price moves in line
with the price of units in the Fund. In that
sense it is influenced by unit holders, who
have a different investor profile to that of
us farmers – a farmer’s cost of capital is
typically higher.
To cater for share flexibility, some
farmers would inevitably have more
shares than others. We believe this is
a more sustainable proposition over
the longer term than the alternatives
we are confronted with.
In Section 5 we detail the alternative
structures that were considered and
the reasons why they are not our
current preferred option. We are
keen to hear your views on these
different variations as part of
the consultation process.
We will seek to cater for the diversity
within the shareholder base, but we will
all need to be pragmatic if we are to find
a way forward together that is in the best
long-term interests of our Co-op.
Once we hear your views, and if the
appetite for change remains, we will
do further work to refine the preferred
option(s) and have a second round of
consultation. If we decide to seek a
change to our capital structure, then you
will have a chance to vote on that change.
As some aspects of our current capital
structure are reflected in the Dairy
Industry Restructuring Act, a successful
vote would likely be conditional on
any necessary changes to legislation
being passed.
I appreciate there is a real sense of
optimism in the Co-op with our improving
financial performance and how we are
travelling generally. But there is a sense
of urgency with this review. Waiting for
the problem to be at our feet will limit
our options and likely increase the cost
of addressing them, at the expense of
future opportunities for us.
Ngā mihi
Peter
Waiting for the problem to be at our feet will limit our options
and likely increase the cost of addressing them, at the
expense of future opportunities for us.
PETER MCBRIDE – CHAIRMAN
3
1 – ON BEHALF OF THE BOARD
2.
Why we’re proposing changes
Getting our capital structure right is
critical to helping ensure the financial
sustainability of our Co-op.
We’ve evolved our structure before,
and it’s important we keep evolving
it as things change.
This section summarises why we believe
it’s time to evolve our capital structure.
The issues outlined are covered in
more detail in Section 4 “How we got
to this point.”
The environment in which we’re
operating has changed a lot
since Trading Among Farmers
(TAF) was implemented.
Our current structure was put in place in
2012 when New Zealand’s milk supply
was growing rapidly.
Now, we face a different reality where
we need to be prepared for a flat
or potentially declining milk supply
environment across New Zealand
in the coming years.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1989/901990/911991/921992/931993/941994/951995/961996/971997/981998/991999/002000/012001/022002/032003/042004/052005/062006/072007/082008/092009/102010/112011/122012/132013/142014/152015/162016/172017/182018/192019/20
NZ MILK SUPPLY (KGMS MILLIONS)
New Zealand Milk SupplyFonterra Milk Supply
This is due to factors such as climate
change impacts, regulatory changes
and alternative land uses. These factors
might not have fully impacted us yet, but
we expect this to change over the next
five to ten years.
Having a sustainable milk supply is critical
for us continuing to deliver on our current
strategy, which is all about prioritising
New Zealand milk.
There are elements of our current
structure that are challenging for a
number of farmers now, or that may
create challenges for our Co-op in a flat
or declining milk supply environment.
These are explained overleaf, and in
more detail on pages 22-23.
4
CAPITAL STRUCTURE CONSULTATION 2021
The level of investment
to be part of our Co-op is
challenging for a number
of farmers.
We all have a lot of capital invested in the
Co-op. While it’s important for each of us
to have skin in the game, we’re hearing
there’s a desire for greater flexibility.
This has come through in your feedback
and we’ve heard it from farmers who have
left in recent years.
The investment that’s required to supply
the Co-op is making it challenging for
new farmers to join and can be a key
factor for existing farmers in deciding
to leave so they can pay down debt or
invest their capital in other things. This
can be a real challenge for succession,
forcing difficult decisions when
farm businesses transition from one
generation to the next.
At a share price of $5.00, a farmer
supplying 150,000 kgMS would have
$750,000 invested in our Co-op.
Strong performance only increases this
investment requirement. As our earnings
increase, so too should the share price,
which increases the capital investment to
join, and the capital for those who leave.
In short, we believe our capital structure
is tilting the playing field against us when
compared to other processors – the vast
majority of which are corporates and
don’t require any capital investment
from farmers who supply them.
What we’re hearing is that providing more
flexibility would be valued by farmers and
go a long way to supporting a sustainable
milk supply.
If we provide more
flexibility, the Fund size
could grow significantly.
Our Co-op has constitutional thresholds
designed to balance the interests
of farmer owners and the interests
of external investors in the Fund.
Exceeding those thresholds could put
farmer ownership and control at risk.
We know that’s not something any
of us want to see.
If we provide more flexibility to reduce
the level of investment for farmers to
be part of our Co-op, without making
any other changes to our current capital
structure, our thresholds could be
exceeded relatively quickly.
That’s because farmers would be able to
hold less shares and non-farmers would
be able to invest more through the Fund.
Therefore, providing more flexibility
would need to be combined with making
changes to the Fund in order to protect
farmer ownership and control.
The Fund size could also grow
if milk supply declines.
Under our current structure, when milk
supply declines, the number of wet shares
on issue decreases and the number of
dry shares increases by a corresponding
amount. Those dry shares can then
be exchanged into units at any time,
increasing the potential size of the Fund.
If we make no changes to our capital
structure and milk supply declines,
we expect current thresholds relating
to the Fund size to be exceeded within
a few seasons.
We have choices to make
around how we could address
these challenges, and we want
to talk with you first.
To stay within the thresholds, our Co-
op would need to take action such as
buying back shares or units. This creates
an uncertain demand on our capital,
potentially impacting our ability to
invest in strategy and growth. Under the
scenarios that we’ve modelled, buy-backs
could cost shareholders between $500
million and $1.2 billion over the next ten
seasons.
We’ve looked at a wide range of options.
No structure is perfect, and all options
have trade-offs. What we’re not willing to
trade off is farmer ownership and control
of our Co-op, which protects our interests
as producers.
Exactly how our capital structure evolves
is a conversation for us as owners and is
what we want to consult with you on now.
5
2 – WHY WE’RE PROPOSING CHANGES
3.
The preferred option and
what it would mean for us
Our aim has been to find options that
give you more flexibility when you
need it but still protect ownership
and control, without compromising
our financial sustainability.
We prioritised a couple of structures
that we thought could best meet the
objectives of the review and after closer
analysis, we have a preferred option –
to adopt a Reduced Share Standard with
either No Fund or a Capped Fund – which
is explained in more detail in this section.
This indicates our current thinking,
but we are open minded about adjusting
that direction based on your feedback.
The other options we considered,
including staying with our current
structure, are outlined in Section 5,
and we will discuss them during the
farmer meetings. Your feedback on
any or all of these is welcome.
We’ve spent a significant
amount of time looking
at a wide range of
alternative structures
as well as options to evolve
our current structure.
6
CAPITAL STRUCTURE CONSULTATION 2021
FROM (BEFORE TEMPORARY CAP)TO
Limited flexibility:Increased flexibility:
»Share standard of 1 share/1 kgMS (1:1) »Share standard of 1 share/4 kgMS (1:4)
»Maximum shareholding of:
– 2x supply; or
– For shares held in excess of supply, up to 5% of the
Co-operative on a look-through basis
»Maximum shareholding of:
– 4x supply; or
– No change
Minimum shareholding requirements based on milk
supply over a rolling three-season average.
No change.
Dividends are discretionary and paid in respect of each
share held.
No change.
Farmer owners have 1 vote per 1,000 kgMS supplied
in the previous season to the extent the supply is
backed 1:1 by shares.
No change, so long as you continue to hold shares on a 1:1
basis relative to your supply in the previous season. If you
choose to only hold the minimum required shareholding
of 1:4, you would have fewer votes than a farmer who
holds 1:1. See also the scenarios on pages 10-11.
Shares traded on the Fonterra Shareholders’ Market
(FSM) (or a similar farmer-only market) and able to be
exchanged into units in the Fund.
Shares traded on the FSM (or a similar farmer-only
market) only. Fund bought back or capped, so no ability
to exchange shares into units.
Share price set by reference to public unit market
alongside the farmer-only market.
Share price set in a farmer-only market.
Share-Up Over Time and MyMilk contracts.Share-Up Over Time and MyMilk contract supply options
would be phased out (although all existing commitments
would be honoured).
The Co-op can deduct, for tax purposes, dividends
paid on supply-backed shares, so shareholders are
paid a pre-tax dividend on those supply-backed shares.
Farmer shareholders are then required to pay tax on
these dividends.
Under current tax legislation, the amount of dividend
that can be passed through to farmers pre-tax would
reduce. However, the Co-op would be able to impute
these dividends with income tax paid by the Co-op after
tax losses are used. See further discussion on page 13.
REDUCED SHARE STANDARD WITH EITHER NO FUND
OR CAPPED FUND
Our preferred option at this stage is for
a Reduced Share Standard, with either
No Fund or a Capped Fund. In this section
we walk through how this could work,
some key things to consider and why
this is our preference.
This involves reducing the share standard
so that the minimum requirement for
farmer owners would be one share
for every four kgMS supplied to the
Co-operative (1:4), rather than the
current share standard ratio of 1:1.
7
3 – THE PREFERRED OPTION AND WHAT IT WOULD MEAN FOR US
No Fund
»Removing the Fund would involve an
offer by Fonterra to unit holders to
buy back their units at a fixed price.
The approval of at least 75% of unit
holders entitled to vote and voting
would be needed for the offer to
be accepted.
»The offer amount would need to be
acceptable to unit holders, fair to
farmers and would need to make
more sense to the Co-op than the
Capped Fund alternative.
Capped Fund
»A Capped Fund would involve the
Fund remaining part of Fonterra’s
capital structure and listed on the
NZX/ASX, but with one key change in
that farmer owners would no longer
be able to sell any further economic
rights of shares into the Fund. Shares
would be tradeable in the FSM only.
»As at 31 March 2021, the Fund
had 105 million units issued, which
comprised 6.5% of total Fonterra
shares. Capping the Fund would
mean that it could get smaller, but
it would not get bigger, other than
in limited circumstances such as
where a distribution reinvestment
plan is offered.
»Members of the public and other
investors, including farmer owners,
sharemilkers, retired farmers
and non-farmer investors, could
continue to trade units in the
NZX/ASX with units continuing to
receive distributions in line with our
performance. Farmer owners would
also still be able to exchange any
units they hold for shares in the FSM.
»This means that the size of the Fund
as a proportion of our Co-op could
not increase materially, but it could
decrease if farmer owners exchange
units they buy or hold into shares.
Fonterra could also potentially buy it
back in the future – partially or fully.
»There could be an ongoing price
difference between the traded price
of shares in the FSM and the traded
price of units in the Fund, for the
reasons described in the key things
to consider on page 12.
Reducing the share standard would
make it easier for new farmers to join
our Co-op and give more flexibility
to existing farmer owners who may
want to free up capital or who are
working through succession. In line
with the Co-operative Principles, the
financial benefits and obligations
that arise from capital invested would
still be allocated in proportion to
shareholding. Control and voting
rights would be based on share-
backed supply in the same way as
today. The caps on share ownership
are intended to protect against
significant levels of concentration
of individual ownership within the
farmer owner base.
However, reducing the share standard
would result in more shares that don’t
need to be held by farmers to supply
the Co-op – or “non-compulsory”
shares. If exchangeability with the
Fund remained in place as in our
current structure, farmer owners
could sell the economic rights of
these non-compulsory shares into
the Fund (i.e. exchange shares into
units to sell those units), causing
the Fund size to grow and exceed
the thresholds that protect farmer
ownership and control of the Co-op.
Because of this, if we want
to provide more capital
flexibility, then we expect that
we would need to take one of
the following actions in order
to protect farmer ownership
and control:
»Buy back and remove the Fund
(No Fund); or
»Stop the exchangeability of
shares for units in
the Fund and thereby cap the size
of the Fund (Capped Fund).
Both these options would be effective
at protecting farmer ownership and
control of the Co-op.
REDUCED SHARE STANDARD
Capped Fund
Tradeable
shares
1:4 share
standard
FARMERS
FSF
Units
EXTERNAL
INVESTORS
REDUCED SHARE STANDARD
No Fund
Tradeable
shares
1:4 share
standard
FARMERS
8
CAPITAL STRUCTURE CONSULTATION 2021
»New members joining the
Co-op and farmers that are
sharing up would need to buy
shares to match 25% of their
supply at a minimum.
»Shared-up farmer owners would
be able to sell down to 25% of
their supply. This might only be
allowed in stages – potentially
over several seasons.
»Any vouchers would be cancelled
(as holders would not need them
to count towards the Reduced
Share Standard).
»Minimum shareholding
requirements would be based on
milk supply over a rolling three-
season average (as it is today).
»Farmer owners would be able
to own up to four times their
supply in shares, but still subject
to the existing limit on shares
in excess of supply, being 5% of
total shares on issue on a look-
through basis.
»Shares would continue to be
traded on the FSM (or a similar
farmer-only market) with either
No Fund or a Capped Fund. This
means the implications of a
farmer-only market outlined on
page 12 would likely apply.
»Dividends would be discretionary
and paid in respect of each share
held (as they are today).
»Voting rights would remain as
they are today, in that farmer
owners would have 1 vote per
1,000 kgMS supplied in the
previous season so long as you
continue to hold shares on a 1:1
basis relative to your supply in
the previous season. This means
that if you only held the
minimum 1:4, you would have
fewer votes than if you held 1:1.
See also the scenarios on
p age s 10 -11 .
»The Share-Up Over Time and
MyMilk contracts would be
phased out and replaced with a
standard period for all farmers
to share up to the Reduced Share
Standard when joining, and to
sell their shares when exiting.
We suggest extending the
share-up and sell-down periods
to five seasons (up from three
seasons today).
»We would continue to honour
all existing Share-Up Over
Time and MyMilk
contractual commitments.
HOW IT COULD WORK:
Below is our current thinking on how a Reduced Share Standard structure could work, having looked at different options
for some of the features, such as the 1:4 share standard and the 4x cap on shares. We are keen to hear your views on
these points over the course of the consultation process.
9
3 – THE PREFERRED OPTION AND WHAT IT WOULD MEAN FOR US
COMPARING THE PREFERRED OPTION TO OUR CURRENT
STRUCTURE FOR FARMERS
Every farmer’s situation would be unique
if we were to evolve our structure
to a Reduced Share Standard with
either No Fund or a Capped Fund.
But the hypothetical scenarios below
are designed to give you a high-level
indication of how things could change
at different stages of your business life
cycle. Note that these are on the basis
that any transition to the preferred
option has been completed.
SCENARIO CURRENT STRUCTURE PREFERRED OPTION
FIRST FARM OWNER
»Planning
to produce
80,000 kgMS
»Holding no shares
or units
»Minimum shareholding requirement:
80,000 shares
»Maximum shareholding: 160,000 shares
»Flexibility:
–Purchase 80,000 shares over three seasons
during the share-up period
–Apply for a Share-Up Over Time contract
and commit to supply the Co-op for
the term (e.g. 6 years), and pay a contract
fee (currently 5c/kgMS) for
non-share-backed supply
–Supply MyMilk under contract with no
shareholding requirement, and pay contract
fee on all supply (currently 5c/kgMS) for up
to five seasons
–Invest further in the Co-op and hold up to
160,000 shares
»Voting: 80 votes if 80,000 or more shares held
»Minimum shareholding requirement:
20,000 shares
»Maximum shareholding: 320,000 shares
»Flexibility:
–Purchase 20,000 shares over five seasons
during the share-up period
–Invest further in the Co-op and hold up
to 320,000 shares
»Voting: 20 votes if 20,000 shares held;
80 votes if 80,000 or more shares held
GROWING FARM
OWNER
»Average production
on first farm is
80,000 kgMS
»Second farm
expected
to produce
80,000 kgMS
»Holding 100,000
shares
»Minimum shareholding requirement:
160,000 shares
»Maximum shareholding: 320,000 shares
»Flexibility:
–Purchase remaining 60,000 shares for
second farm over three seasons during
the share-up period
–Apply for a Share-Up Over Time contract
for 60,000 kgMS, but would need to
commit to supply for the term, and
contract fee (currently 5c/kgMS) for
non-share-backed supply
–Supply MyMilk from second farm under
contract with no shareholding requirement,
subject to contract fee (currently 5c/kgMS)
and potentially sell 20,000 shares to free up
capital for on farm investment
–Invest further in the Co-op and hold up to
320,000 shares
»Voting: 160 votes if 160,000 or more
shares held
»Minimum shareholding requirement:
40,000 shares
»Maximum shareholding: 640,000 shares
»Flexibility:
–Sell up to 60,000 shares to free up capital,
(e.g. for second farm investment)
–Invest further in the Co-op and hold up
to 640,000 shares
»Voting: 40 votes if 40,000 shares held;
160 votes if 160,000 or more shares held
10
CAPITAL STRUCTURE CONSULTATION 2021
SCENARIO CURRENT STRUCTURE PREFERRED OPTION
ESTABLISHED FARM
OWNER LOOKING TO
INVEST CAPITAL
»Average production
is 200,000 kgMS
»Holding 200,000
shares
»Minimum shareholding requirement:
200,000 shares
»Maximum shareholding: 400,000 shares
»Flexibility:
–Invest further in the Co-op and hold up to
400,000 shares
»Voting: 200 votes if 200,000 or more
shares held
»Minimum shareholding requirement:
50,000 shares
»Maximum shareholding: 800,000 shares
»Flexibility:
–Invest further in the Co-op and hold up to
800,000 shares
»Voting: 50 votes if 50,000 shares held;
200 votes if 200,000 or more shares held
RETIRING FARM
OWNER LOOKING TO
RELEASE CAPITAL
»Average production
is 120,000 kgMS
»Holding 150,000
shares
»Minimum shareholding requirement:
120,000 shares
»Maximum shareholding: 240,000 shares
»Flexibility:
–Sell up to 30,000 shares to free up capital
»Voting: 120 votes if 120,000 or more
shares held
»Minimum shareholding requirement:
30,000 shares
»Maximum shareholding: 480,000 shares
»Flexibility:
–Sell up to 120,000 shares to free up capital
»Voting: 30 votes if 30,000 shares held;
120 votes if 120,000 or more shares held
11
3 – THE PREFERRED OPTION AND WHAT IT WOULD MEAN FOR US
KEY THINGS TO CONSIDER
Impacts of a farmer-only market
»If we moved to this structure, shares
would be traded within a farmer-only
market, either with the No Fund
option or Capped Fund option.
»The biggest implication of trading
in a farmer-only market is that
farmers will set the price for
shares through trading amongst
themselves. This is likely to be
different to how outside investors
value units in the Fund today.
»You may hear the potential price
difference in a farmer-only market
referred to as a “restricted market
discount”. Restricted market discounts
are commonly observed in any
market where participation is
restricted (in this case, to farmer
owners). A restricted market already
exists in other New Zealand
agricultural companies you may
be invested in.
»We can’t be certain what the price
difference might be, but the advice
that we have received is that in
normal trading the share price is
likely to be in the range of 20-25%
lower than if the current structure
was retained. If there are times
when there is stronger sell-side
pressure – for example if farmers
are experiencing financial pressure
or otherwise need to sell shares
(for example if milk supply falls)
– then the discount is likely to be
greater.
»In a farmer-only market there may
be lower levels of trading (liquidity).
While we would retain a “market
maker” – the registered volume
provider who is active in making bids
and offers on a minimum number of
shares in the FSM – the share price
could move more on small volumes
of trading in a farmer-only market.
»If we reduce the share standard and
more farmers wish to reduce their
shareholding than those looking to
increase, there could be sell-side
pressure, which could negatively
impact the share price. This may
be more apparent under certain
circumstances. Examples include
during transition to a reduced share
standard (if many farmer owners
choose to sell down), during a period
of milk supply decline and farmers
who are reducing their volumes or
exiting sell their shares, or in times
when all farmer owners may be
negatively impacted by common
events such as low milk prices or
widespread droughts.
»The impacts of a farmer-only
market could be different to what
happens during the temporary cap
we have implemented in order to
enable consultation. This is because
all compliance obligations are on
hold during the temporary cap
and because we are consulting
on potential changes so there is
a degree of uncertainty about
our future capital structure. If a
Reduced Share Standard structure is
implemented, then that uncertainty
would no longer exist – some farmer
owners would be required to trade
shares to at least comply with
the Reduced Share Standard and
some farmer owners may choose
to buy shares over and above their
individual minimum requirements.
»The Fund also provides a mechanism
for those with connections to the
Co-op such as sharemilkers, contract
milkers, employees and retiring
farmer owners to invest in the Co-op.
With the No Fund option, this would
no longer be available.
Flexibility in how this structure
could work
We have put forward some of the
mechanics for how a Reduced Share
Standard structure could work and
we hope that these will help guide
our discussions during consultation.
However, many variables are flexible,
and we welcome your feedback.
»The Reduced Share Standard is
intended to provide meaningful
flexibility for farmers to reduce their
shareholding while ensuring there
is sufficient ability for other farmers
to hold a greater number of shares
without giving rise to a significant
concentration of ownership. We
propose that a share standard
ratio of 1:4 with a 4x maximum
shareholding cap (or for shares
held in excess of supply, 5% on a
look-through basis) strikes a good
balance. A higher share standard
ratio of say 1:2 might not provide
enough flexibility for new and young
farmers. A ratio of say 1:10 that
12
CAPITAL STRUCTURE CONSULTATION 2021
allowed farmers to lower their share
ownership even further would mean
the 4x cap would need to be higher
so that there would be enough
buyers in the farmer-only market.
This could potentially give rise to too
much concentration in ownership
with a small group of farmers, or
some farmers not having the level of
connection to the Co-op that keeps
us strong together.
»We have maintained some variables
from our existing structure for
simplicity and continuity, such as
the three-season rolling average,
and dividend and voting rights as
we do not think these would need
to change if we reduced the
share standard.
»We do not yet have firm views on
the timeframe to share-up and
share-down to the new standard.
We are very open to your thoughts
on what you would like to see here.
Our current view is that we would
want to see any timeframes captured
in the Constitution rather than
through Share-Up Over Time
contracts. At this stage, we have
suggested five seasons to share-up
on joining the Co-op and five seasons
to share-down on exiting the Co-op.
Co-operative alignment
»A Reduced Share Standard structure
allows farmer owners to have
different levels of capital invested
in the Co-op relative to their milk
supply which might mean that
farmers have different interests
in the Co-op. For example, some
farmers are likely to hold more
shares in proportion to milk supply
than other farmers.
»While all farmers would have some
equity in the Co-op through the
Reduced Share Standard, some may
have greater equity than others.
Retaining the payment of dividends
on a “per share” basis and voting on
a “per 1,000 kgMS backed by shares”
basis, as they are today is intended
to recognise this.
»When it comes to voting rights and
the potential for concentration of
ownership, it’s important to note
that because voting rights would be
“per 1,000 kgMS backed by shares”,
a farmer who continues to hold
shares on a 1:1 basis relative to their
supply in the previous season will
retain the same voting entitlement
as today, and a farmer who holds
additional shares over the 1:1 basis
(up to the maximum shares at 4x
kgMS supplied) would only have
voting rights up to the 1:1 level, not
their full shareholding.
»We welcome your views on
whether there should be any other
mechanisms to support greater
alignment between farmers.
Timing of Transition
»We may want to transition to a
Reduced Share Standard over
multiple seasons by gradually
reducing the share standard, rather
than reducing it all at once. This
would help reduce supply-side
pressure in the farmer-only market.
We welcome your views on this.
Tax impac t s
»Currently the Co-op can deduct,
for tax purposes, dividends paid
on supply-backed shares and
shareholders are subject to tax on
these dividends.
»The number of supply-backed shares
would reduce under a Reduced Share
Standard, so there would be a tax
impact under current tax legislation,
in that the amount of dividend
that can be passed through to
shareholders pre-tax would reduce.
»This would have the effect of
increasing the Co-op’s annual tax
charge, but is not expected to have
a cash impact for the Co-op in the
short term due to current tax losses
the Co-op can use.
»Once the Co-op has used those
tax losses ($1.52 billion as at
31 July 2020), the Co-op would
start paying tax on earnings on
behalf of shareholders, and
shareholders would receive
imputation credits to pass on
the tax paid.
»The ability of individual farmer
owners to utilise imputation
credits to offset their tax expense
would depend on their individual
tax circumstances.
13
3 – THE PREFERRED OPTION AND WHAT IT WOULD MEAN FOR US
WHY THIS IS THE PREFERRED OPTION
We prefer the Reduced Share Standard structure over the other options outlined in Section 5 for several reasons.
»Overall, we think this structure measures well against the design principles for the review while remaining aligned
with our Co-operative Principles. It supports a strong Co-operative and sustainable milk supply but still requires
all suppliers to become farmer owners with “skin in the game”, and all farmer owners have exposure to both milk
price and some earnings.
»It is preferable to a Dual Share structure (outlined in Section 5) at maintaining a strong balance sheet for our
Co-op. This is a high priority for us and was also reflected in farmer feedback. This is because retaining a single
share would mean that all share capital is rated as equity (which would not be the case under a Dual Share
structure where one of the shares may be partially classified as debt by ratings agencies).
»We think it would be more straight forward to implement than other options.
We have also reached a preliminary view that having No Fund would be preferable to a Capped Fund because it
simplifies our Co-op. However, if we cannot reach an acceptable arrangement to buy back the Fund that 75% of voting
unit holders support, then a Capped Fund would also work. In other words, we would only seek to remove the Fund
at a reasonable price that was acceptable to unit holders, fair to farmer owners and made sense to the Co-op compared
to the Capped Fund alternative.
14
CAPITAL STRUCTURE CONSULTATION 2021
Capital structure is an important conversation for us as
owners. We want to hear your feedback on any or all of the
topics discussed in this booklet.
Do you think that there is a clear rationale for
moving away from the current structure?
What do you see as the benefits and challenges
with a Reduced Share Standard structure?
Do you see reducing the share standard as being
effective at creating flexibility for farmers? Do you
believe that this will make it easier for farmers to
join and stay with the Co-op?
What are your views on moving to a farmer-only
market and the potential impacts?
What do you think about the variables within this
structure such as:
–the share standard ratio of 1:4
–the maximum cap on shareholding of 4x supply
–the timeframe to share-up and share-down of five seasons
–phasing out Share-Up Over Time contracts and/or
MyMilk contracts
–whether we transition to a Reduced Share Standard over
several seasons, or if we change all at once
What are your views on how we support alignment
between farmer owners on items like voting
rights? For example, should voting remain linked
to share-backed supply, or should some other
mechanism be considered?
Should sharemilkers and others working toward
farm ownership be able to directly participate in
the Fonterra Shareholders’ Market?
15
3 – THE PREFERRED OPTION AND WHAT IT WOULD MEAN FOR US
4.
How we got to this point
A BRIEF HISTORY OF OUR
CAPITAL STRUCTURE
When Fonterra was formed in 2001,
Co-operative shares were issued to
farmer owners in proportion to supply.
Our Co-op redeemed the shares of
exiting farmers and those who reduced
supply for cash at a value that was set
annually by an independent valuer.
When a large number of farmers exited
or reduced supply (e.g., during periods
of drought), our Co-op had to redeem
those shares and pay out the value –
known as “redemption risk”.
In 2012, we implemented the current
Trading Among Farmers (TAF) structure,
primarily to manage redemption risk.
There are two key parts to TAF, which
are illustrated on the right.
1. THE FONTERRA SHAREHOLDERS’ MARKET (FSM)
This is the farmer-only market where farmers trade shares in our Co-op
between themselves. The introduction of this market and the other TAF
amendments in 2012 meant that our Co-op no longer had to issue and
redeem shares.
2. THE FONTERRA SHAREHOLDERS’ FUND (FSF OR FUND)
This is a managed investment scheme under the Financial Markets Conduct
Act. It is listed on the NZX Main Board and on the ASX, and units in the
FSF can be bought and sold by the public in the same way as any other
listed security.
Units in the FSF give the holder access to the economic rights in a share
(such as distributions or dividends). Like any member of the public,
farmer owners can also trade units in the FSF.
16
CAPITAL STRUCTURE CONSULTATION 2021
To be part of our Co-op, the current
minimum requirement is to hold one
share for every kgMS supplied. This is
based on a three-year rolling average
supply. Farmer owners may, but are not
required to, hold additional shares, up
to 2x the minimum shareholding. For
any farmer choosing to leave the Co-op,
there’s a requirement to sell shares
within three seasons at a minimum rate
of one third per season.
The number of shares that are matched
to milk production are known informally
as “wet shares” while the shares that
are held in excess of the wet share
requirement are known as “dry shares”
– although they are in fact all the same
single class of share.
Farmers can buy or sell shares on the
FSM. Farmers can also sell the economic
rights of shares into the Fund (except
when a temporary cap is in place). In
this case, the farmer-owned Custodian
holds legal title to the share and a unit
in the Fund is issued, which is then sold
on the market. Apart from two supply
offers early in the establishment of TAF,
farmers have only been allowed to sell
the economic benefit of dry shares, not
wet shares, into the Fund. Farmers can
also exchange units back into shares.
In this case the unit is cancelled and the
Custodian transfers title to the underlying
share back to the farmer owner.
When TAF was implemented, certain
protections were put in place in relation
to the Fund size to help protect farmer
ownership and control. These included
an Overall Limit on the Fund size of
20% of our total shares on issue, and
an Aggregate Threshold of 15% for
the number of dry shares as a proportion
of total shares on issue. As at 31 March
2021, the Fund size was 6.5% of our
total shares on issue and the Aggregate
Threshold was 14.0%. If these thresholds
are exceeded, our Co-op would need
to take action to get back under the
thresholds again. The most likely action
to achieve this under the current settings
would be for our Co-op to allocate
capital to buy back units or shares.
TAF helped to address some of the
challenges we faced when it was
implemented in 2012.
But it has been important to look at
whether it will support our financial
sustainability into the future based on
how much has changed since then.
17
4 – HOW WE GOT TO THIS POINT
Recap of changes made in 2019 strategy refresh
FROMTO
VolumeValue
Global Milk PoolsPrioritise New Zealand Milk + complementary components
Maximum volume into consumerFocus on key categories to deliver superior value
Dairy onlySupplement with non-dairy where makes sense
Partner with cash investmentsPartner with IP and skills and lift R&D
Debt funded growthConservative balance sheet
Global giant with HQ in New ZealandCelebrate Aotearoa New Zealand and take it to the world
Invest widely based on aggressive growth plans
Divest non-core businesses and focus where we have a
competitive advantage
A RECAP OF OUR STRATEGY
Capital structure helps us execute our
strategy successfully over the long-
term, so it’s important we’re all clear
on where we’re headed as a Co-op
before implementing any changes to our
structure. Our 2019 refresh considered
what we needed to do to both reset our
business and achieve sustainable value
over time, by responding to changing
consumer, customer and market needs.
We made some big decisions about the
kind of Co-op we want to be.
18
CAPITAL STRUCTURE CONSULTATION 2021
OUR STRATEGY PRIORITISES
NEW ZEALAND MILK
Our strategy is about prioritising
New Zealand milk and growing demand
for it by understanding our customers,
and differentiating our Co-op’s milk
through innovation, sustainability
and efficiency.
We are focusing on five categories
– Core Dairy (cream, butter, cheese,
milk powder), Foodservice, Paediatrics,
Sports & Active and Medical & Ageing.
We already have a competitive advantage
in some of these five categories and
in others we are drawing on our dairy
know-how and innovation capabilities
to strengthen our positions.
The Co-operative Difference is
building on the work farmers have
done over recent years to earn more
premiums for our products based on
their New Zealand provenance and
sustainability performance.
We measure success on how we’re
progressing towards our three
interconnected goals – Healthy
People, Healthy Environment and
Healthy Business.
Raising additional capital is not
the purpose of this review.
Having adequate and sustainable access
to capital to fund our strategy is always
front of mind, and raising additional
capital is not the purpose of this review.
We will fund our strategy through a
strong balance sheet, cashflow, and
through leveraging our IP and innovation
capability to partner in new products and
categories where it makes sense.
This capital structure review is
about prioritising New Zealand milk,
protecting farmer ownership and
supporting a sustainable milk supply
over the longer term.
Our strategy is dynamic, and we will
always be reviewing our portfolio –
asking ourselves what each asset is worth
to us now and into the future. We will
continue to turnaround key parts of our
portfolio and divest non-core businesses
to support new investments as necessary.
Our focus is on maintaining a strong
balance sheet to support growth.
We’re building good
momentum and we are
well positioned to make the
most of future opportunities.
We have been making good progress
across the Co-op, including improved
business performance, a stronger
balance sheet with reduced debt levels
and dividend payments being resumed.
Our strategic direction, combined with
a diversified portfolio, has positioned
us well to navigate through a period of
unprecedented global uncertainty as a
result of COVID-19. While there is still
more work to do, we remain on track to
deliver our targets.
PAEDIATRICSCORE
DAIRY
MEDICAL
& AGEING
SPORTS
& ACTIVE
FOOD
SERVICE
SUSTAINABLE VALUE
Prioritising
New Zealand milk
Sustainability
To do what’s right for the
long term good and meet
consumer and community needs
Innovation
To create superior value
for our customers and
our Co-operative
Efficiency
Unlock greater value from
our scale efficiency and
focus on execution
19
4 – HOW WE GOT TO THIS POINT
Design principles
Ownership & Control
Does the structure preserve farmer ownership and control of the Co-operative for
the long term?
Sustainable Milk Supply
Does the structure support our ability to attract and retain high quality, sustainable
milk and provide financial flexibility for farmers?
Protect Value
Does the structure protect value for current Co-operative members and allow farmers
to transact their membership / shareholding in a way that is fair?
Align Incentives
Does the structure align incentives between shareholders, unitholders and
management, to maximise value?
Build Resilience
Does the structure manage redemption risk and economic shocks in a way that makes
the Co-operative resilient?
Transition Effectively
Is the transition to a potential new structure affordable, achievable and fair to
unitholders and farmer shareholders?
Access Capital
Does the structure preserve balance sheet strength and provide access to capital at
a reasonable cost in the future?
Simple
Is the structure simple to understand and simple to operate for both farmers and
the Co-operative?
HOW WE WENT ABOUT OUR CAPITAL STRUCTURE REVIEW
We were clear from the beginning about
our objective: to have a capital structure
that ensures our Co-op’s financial
sustainability so we can deliver value
for this generation and the next.
We started by identifying what the key
elements of a financially sustainable
Co-operative are and developing a set
of design principles. We shared these
with you after our annual results in
September 2020.
The wide range of alternatives that we
looked at were assessed and prioritised
based on how well they met the objective
and design principles outlined below.
We listened to farmer views.
It was clear from the outset that
consultation for this review would be
more challenging than last time because
both shares and units in the Fund are
traded securities and we are legally
required to comply with financial market
continuous disclosure rules.
While we would have liked to have been
out on the road discussing options
with you earlier, we have gained useful
insights from farmer workshops on
capital flexibility that were held in 2019,
the roadshows after annual results and
interim results, a phone survey we did
in December 2020 of a representative
sample of 350 farmer owners, as well as
the online survey available to all farmers
from January to February 2021 where we
had around 1,800 responses.
Your feedback has very much helped to
shape the direction of the review so far.
20
CAPITAL STRUCTURE CONSULTATION 2021
THE DETAILED FINDINGS OF THE REVIEW
We heard what’s most
important to you.
The online survey results confirmed that
there is an appetite for change, with 62%
of respondents either strongly or slightly
supporting a change.
The results also gave us an insight into
what you consider are the main priorities
when it comes to capital structure. We
asked you to select up to three areas
most important to you, and you can see
in the graphic below the percentage
of respondents who put the following
factors in their top three.
Those areas in dark blue are the
standouts, but we also heard that our
capital structure should make it easy for
new farmers to join the Co-op and for
existing farmers to have more flexibility.
The survey results are similar to the
feedback we’ve had from farmers who
have left the Co-op in recent years.
Essentially, the lack of flexibility in
our current structure means that it’s
challenging for new farmers to join
and can be a key factor for existing
farmers in deciding to leave the Co-op.
82%
65%
30%
14%
18%
18%
6%
7%
4%
53%
Maintaining farmer ownership and control of the Co-op
Making sure Fonterra has a strong balance sheet that is resilient
to changing milk supply & climate or economic shocks
Providing a good return on investment
Making it easy for new farmers to join the Co-op
Giving farmers more flexibility about how much
they invest in the Co-op
Being simple to understand
Providing growth in the capital invested in the Co-op over time
Aligning incentives between shareholders, unitholders
and management to maximise value
Having a high share price
Being able to raise capital from non-farmer investors
WHY WE HAD TO IMPLEMENT A TEMPORARY CAP ON THE FUND
At the same time as launching this consultation process, we announced that we’d be temporarily capping the size of the Fund
by suspending shares in the FSM from being exchanged into units in the FSF while we consult with you. We’ve done this to
ensure that all options remain open to us as we have this conversation.
As we progressed the review and started looking into options that included buying back the Fund, we identified a risk
that, if we started consulting on options for change without temporarily capping the Fund, the Fund size could have grown
significantly and taken the option of buying back the Fund off the table before you even had a chance to consider it.
Some of the options have the potential to see differences emerge between the price at which a share trades in the FSM
compared to what a unit in the Fund trades at, with units trading at a higher price than shares. If the temporary cap was not in
place, anyone holding dry shares would be able to exchange them into units in the Fund. This could more than double the size of
the Fund and make options that include buying back the Fund unaffordable in the context of our current balance sheet targets.
That’s why we had to temporarily cap the Fund at its current size before consulting on options. This was necessary to enable
full discussion with you without ruling out options that potentially buy back the Fund. It’s important to note that pricing under
the temporary cap may not reflect pricing of shares in a farmer-only market.
21
4 – HOW WE GOT TO THIS POINT
HOW DOES OUR CURRENT STRUCTURE CONTRIBUTE TO US HAVING TO INVEST
SO MUCH CAPITAL?
The features of our current capital structure that influence the level of investment include:
1. The share price is partly set by reference to the value of units traded in a public market. Investors in public markets may
value shares differently than farmers. On the whole, farmers are less diversified and have competing priorities for their
capital – their investments are more focussed (i.e. in farming operations) and therefore it’s not possible to ‘diversify away
the risk’ like an investor. Therefore, it is likely that farmers require a greater return from a share to make holding the share
worthwhile. This means investors in the Fund may be more willing to pay a higher price for a unit than farmers would
otherwise be willing to pay for a share.
2. The single class of Co-op share bundles together your right to supply the Co-op and the requirement to invest in its
business, including value-added activities. This together with the current share standard means our farmer owners have
little choice about the level of exposure they have to Fonterra’s value-added activities, and little flexibility around the level
of investment required at various stages of their business life cycle.
In addition to this, when our earnings increase, the share price should increase – so when our Co-op is doing well, our capital
structure means it costs more for new suppliers to join and for existing suppliers to increase supply to our Co-op and the
higher share price may also be a key factor for existing farmers to leave our Co-op.
Overall, we believe that our capital structure is tilting the playing field against us when compared to other processors –
the vast majority of which are corporates who don’t require any capital investment from farmers who supply them.
We found that our current
capital structure could create
challenges over time.
Our current capital structure was put in
place when New Zealand milk supply was
growing rapidly. Today, we have to be
prepared for a future of flat or potentially
declining milk volumes.
It is important to remember that under
our current capital structure, when milk
supply declines, the number of wet shares
decreases and the number of dry shares
increases by a corresponding amount.
We have tested our current structure
against potential declining milk supply
scenarios based on variations of the
average net loss of milk we’ve seen over
the past five seasons and the expected
losses from factors such as climate
change, new regulations and alternative
land uses after allowing for potential
productivity gains.
In the chart below:
»Scenario 1 represents environmental changes, land use changes, and changes in
productivity, and assumes that our market share continues to change at half the
rate of the past five seasons. This scenario could result in a decline in milksolids
collected to around 1,300 million kgMS in the relevant period.
»Scenario 2 represents the same environmental changes, land use changes,
and changes in productivity, but assumes that market share continues to
change at the same rate as it has over the past five seasons. This scenario could
result in a decline in milksolids collected to around 1,200 million kgMS in the
relevant period.
»The scenarios start from the 2019/20 season’s actual milk collections of
1,517m kgMS.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2001/022003/042005/062007/082009/102011/122013/142015/162017/182019/202021/222023/242025/262027/282029/30
MILK SUPPLY SCENARIOS (KGMS MILLIONS)
Fonterra Milk CollectionsScenario 1Scenario 2
kgMS (millions)
22
CAPITAL STRUCTURE CONSULTATION 2021
Declining milk supply would reduce the
number of supply backed (or “wet”)
shares. These shares would then become
dry shares, and the economic rights to
these dry shares could then be sold into
the Fund. Our Constitution currently
sets a threshold for dry shares of 15%
of total shares (Aggregate Threshold). As
at 31 March 2021, dry shares comprised
14.0% of total shares on issue.
These milk supply scenarios suggest
that the thresholds that were put in
place when our current structure was
implemented to help protect farmer
ownership and control could be
exceeded within a few seasons.
If our milk supply continues to decline to
the extent suggested by the scenarios,
this threshold is likely to be exceeded
within the next few seasons and our
Co-op would need to take action to stay
within it – such as buying back shares
or units. Buy-backs could impact our
balance sheet and investment in other
strategies that increase performance.
Under these scenarios, buy-backs could
potentially cost all shareholders between
$500 million and $1.2 billion over the
next ten seasons.
An alternative to this would be to
increase the thresholds and allow a
greater degree of external investment
in the Co-op’s performance through
the Fund. However, our view is that the
greater this external investment, the
greater the risk to farmer ownership and
control of the Co-op in the long term.
We don’t think either of these outcomes
are ideal, and we’ve reached the view
that we need to have a conversation as
a Co-op about the next steps for our
capital structure.
Any change takes time, and if we don’t
start now, our options may become more
limited, and the cost of addressing these
challenges may increase.
We found there are strong
potential options for change
and we now want to hear
your feedback on them.
We looked at a wide range of alternatives
to see which would be best at addressing
the findings of the review and help
ensure a financially sustainable Co-op
over the long term.
To give these discussions some structure,
the Board has put forward a preferred
option – to adopt a Reduced Share
Standard with either No Fund or a
Capped Fund (see more in Section 3).
This indicates our current thinking, but
we remain open minded about adjusting
that direction based on your feedback.
The other options we considered,
including staying with our current
structure, are included in Section 5.
Your feedback on any or all of these
is welcome.
WE HAVE RESPECTED THE CO-OPERATIVE PRINCIPLES
BELOW IN CONSIDERING OPTIONS FOR CHANGE:
1. Shares in Fonterra Co-operative Group can only be acquired by persons
supplying milksolids to Fonterra.
2. Fonterra supplying shareholders agree to the dual commitment to supply
milk and invest capital.
3. Supplying shareholders must comply with the Co-operative Share Standard
in respect of their milksolids supplied.
4. Control of Fonterra is exercised by its supplying shareholders who have
voting rights in proportion to their total milksolids supplied.
5. Financial benefits and obligations that arise from selling milk are allocated
to supplying shareholders in proportion to their total milksolids supplied.
6. Financial benefits and obligations that arise from invested capital are
allocated to shareholders in proportion to their shareholding.
CUMULATIVE DRY SHARES IN EXCESS OF AGGREGATE THRESHOLD
0
50
100
150
200
250
2020/212021/222022/232023/242024/252025/262026/272027/282028/292029/302030/31
Scenario 1Scenario 2
Dry Shares (m)
23
4 – HOW WE GOT TO THIS POINT
5.
The other options considered
during the review
Dual Share with either
No Fund or Capped Fund
This structure involves moving away from
our current single Co-operative share to
a structure with two classes of shares –
a compulsory supply share and a separate
non-compulsory investment share.
As with the Reduced Share Standard
structure, the Dual Share option would
give more flexibility to farmers but
also has the potential for the existing
constitutional thresholds to be exceeded
if we took no action in relation to the
Fund, as the investment shares could
move into the Fund over time. That’s
why we would need to combine the
Dual Share option with either one of
the following actions:
»Buy back and remove the Fund
(No Fund); or
»Stop the exchangeability of shares
for units in the Fund and capping
the size of the Fund (Capped Fund).
Our review considered a wide range
of capital structure options from
co-operatives around the world – both
within and outside the dairy sector.
We also considered our current structure
as an option, including whether there
was the ability to make any adjustments
within the current framework that
would better support a financially
sustainable Co-operative.
We then prioritised a couple of options
that we thought could best meet the
design principles for closer analysis
and refinement. In addition to the
Reduced Share Standard structure
outlined in Section 3 of this booklet,
we also prioritised a structure that we
call Dual Share with either No Fund
or a Capped Fund.
This is outlined to the right, followed by
our current structure and then a summary
of the other main structures that we
considered earlier in the review.
DUAL SHARE
No Fund
A
Nominal
supply
shares
B
Tradeable
investment
shares
FARMERS
DUAL SHARE
Capped Fund
Units
A
Nominal
supply
shares
B
Tradeable
investment
shares
FARMERS
EXTERNAL
INVESTORS
FSF
24
CAPITAL STRUCTURE CONSULTATION 2021
HOW IT COULD WORK:
Below is how we think the features
of a Dual Share structure could work,
but as with the Reduced Share Standard
structure and other options, these
mechanics could be changed.
»The supply share would have a
nominal value of $1. The Co-op
would issue and redeem supply
shares to you based on your kgMS
supplied. This would be similar to
the arrangements before TAF, but
at $1 per supply share, rather than
a share price being set each year
by a valuer.
»The share standard would be one
supply share for each kgMS supplied
based on a rolling three-season
average, but there could also be
a buffer of +/- 5% to allow for
fluctuations between seasons.
»The supply share would be:
–Issued for cash (although this
could be payable over a share-
up period or out of your milk
payments); and
–Redeemed with an equivalent
value of investment shares, or
another instrument such as a
capital note, or, after an initial
five-year period, for cash.
»The investment share would be
optional and traded on the FSM
(or a similar farmer-only market),
with either No Fund, or a Capped
Fund where each unit represents
the economic benefit in an
investment share.
»This means that new members
joining the Co-op would only need to
buy $1 nominal value supply shares
to match their supply, and if you are
already a fully-shared farmer owner
you would be able to sell down your
investment shares if you wanted.
»Farmer owners would be able to
hold the lower of up to four times
their supply in investment shares, or
investment shares in excess of supply
representing 5% of the investment
shares on a look-through basis.
»Dividends would be discretionary
and paid on both supply shares and
investment shares. The dividend
on supply shares would be capped
at a fixed level that is reflective of
the risk on those supply shares. Any
surplus dividend would be paid on
the investment shares only.
»Supply shares and investment shares
held by a farmer owner would both
carry potential votes:
–1 vote per 1,000 kgMS supplied in
the previous season to the extent
backed by supply shares; and
–An additional 1 vote per 1,000
kgMS supplied in the previous
season, to the extent backed by
investment shares. This means
that if you hold one investment
share for every supply share you
will get 2x votes, but if you hold
two, three or four investment
shares for every supply
share you would not get any
additional votes.
»The Share-Up Over Time
contracts and MyMilk contracts
would be phased out and replaced
with a standard period for all
farmers to pay for the supply
shares they would be issued in
their first season (of say five
seasons). The Co-operative would
redeem all supply shares once the
farmer has stopped supplying (by
exchanging them for investment
shares or other instruments as
described above). Exiting farmers
would have a longer period to sell
their investment shares, such as
five seasons.
NO FUND – see pg. 8
CAPPED FUND – see pg. 8
25
5 – THE OTHER OPTIONS CONSIDERED DURING THE REVIEW
Some considerations for the Dual Share
option are similar to those for the
Reduced Share Standard structure.
»This option gives farmers the ability
to choose whether or not to invest in
the Co-operative beyond milk supply
and the associated compulsory
supply shares.
»Because the supply share would
carry a nominal price, this price
would not fluctuate over time. This
means that those farmer owners
that choose to hold only supply
shares would not carry any risk of
movements in the Co-operative
share price over time.
»Farmer owners would not be
required to hold any investment
shares and could therefore choose
to remove most of their exposure to
earnings performance.
»Features such as the nominal value
for the supply share and the cap on
investment shares could be changed
over time. In addition, the dividend
on supply shares, voting rights
and the timeframes for sharing up
and selling shares on exit could be
set differently.
»The impacts of a farmer-only market
and the regulatory impacts outlined
on page 12 under the Reduced Share
Standard structure would also apply
to this Dual Share option.
The key reasons why this is not our
preferred option are:
»The supply share is likely to be
treated as a half debt and half
equity (“hybrid”) instrument by
the rating agencies that review
Fonterra’s financial strength, and
as debt for accounting purposes.
This means that it would reduce
the Co-operative’s balance sheet
capacity by around $750 million
(or potentially $1.5 billion if it is
rated as all debt), which could limit
our financial flexibility over time.
»A Dual Share structure could
result in less alignment among the
Co-operative’s farmer owners than
a Reduced Share Standard structure.
Farmer owners that choose to only
hold supply shares may be more
interested in investment in activities
that are milk price focussed with less
interest in value-adding strategies
and investments. On the other hand,
those farmer owners with a large
proportion of investment shares
may be more aligned with business
decisions that drive earnings.
»As there would be no requirement
for farmer owners to hold investment
shares, there may be less liquidity
in a farmer-only market than under
a Reduced Share Standard.
»A Dual Share structure is likely to be
more complex to transition to and
operate over time.
We welcome your thoughts on the
features of this option and the relative
risks and benefits.
KEY THINGS TO CONSIDER
26
CAPITAL STRUCTURE CONSULTATION 2021
What are your views on retaining
our current structure?
What are your
views on the Dual
Share structure?
CURRENT STRUCTURE
The key features of our current structure
are outlined in Section 4.
Under our current structure, if milk
supply declines to the extent suggested
by the scenarios, Fund size limits would
likely be exceeded. This would mean that
the Co-op would need to take action
CURRENT STATE
TAF
Tradeable
shares
FARMERS
FSF
Units
EXTERNAL
INVESTORS
such as an ongoing programme of
share buy-backs to maintain the Fund
within the thresholds set out in our
Constitution. Buy-backs mean that we
would have an uncertain demand on
our capital, which compromises our
ability to invest in strategic initiatives
to grow value for shareholders. If we
didn’t buy back shares, we may need
to increase the Fund size limits, which
could put farmer ownership and
control of our Co-op at risk.
If we do not have enough farmer
owner support for change, we
can continue with our current
structure for a period of time,
but the challenges identified will
ultimately need to be addressed if
milk supply declines to the extent
suggested by the scenarios. This is
why it is so important that we hear
your feedback on the options.
27
5 – THE OTHER OPTIONS CONSIDERED DURING THE REVIEW
Traditional “nominal share” options
This option would require us to return to
a nominal share only structure, similar
to a traditional co-op model. This would
mean that farmer owners would only
need to hold a nominal share (e.g. $1)
for every kgMS supplied.
While this would significantly reduce
the barriers to entry and incentives to
leave for all farmer owners, we did not
prioritise this because transitioning to
a nominal $1 share would require all
current shares on issue to be bought
back. This would require significant
capital to be returned to farmer owners,
which would be unaffordable. We also do
not think this would be achievable under
the current regulatory environment in
New Zealand.
Options that allow Unshared Supply
We considered allowing a greater
proportion of unshared supply in the
Co-op. Unshared supply means that milk
could be supplied to the Co-op without
any capital investment.
We did not prioritise unshared supply
options because they are less aligned to
our Co-operative Principles, and they
set up incentives for farmers to become
unshared suppliers in order to free up
capital. We feel it is important that our
capital structure should be on the basis
that all suppliers to the Co-op have some
capital commitment or “skin in the game”.
While unshared supply options could be
implemented with or without the Fund,
if the Fund was retained and a large
proportion of farmer owners wished to
transition to unshared supply, it could
grow significantly and we would likely
need to move to a Capped Fund. If a
significant number of farmers chose
to become unshared, this could also
have implications for concentration
of ownership amongst a small group
of farmers.
OTHER OPTIONS CONSIDERED, BUT NOT PRIORITISED
A number of other options were considered in the review but not prioritised. The main
ones are summarised here, but again there are variations within each:
TRADITIONAL
CO-OPERATIVE MODEL
Nominal
shares
FARMERS
UNSHARED SUPPLY
+ Fund
Unshared
Supply
Units
Tradeable
investment
shares
FARMERS
EXTERNAL
INVESTORS
FSF
UNSHARED SUPPLY
No Fund
Tradeable
investment
shares
FARMERS
Unshared
Supply
28
CAPITAL STRUCTURE CONSULTATION 2021
Options that split the
Co-operative
This option would see the Co-op split
into core processing assets that
farmers would continue to wholly own,
and a separate “value-add” entity that
external investors could invest in.
Only farmer owners would hold shares
in the core processing assets which
could have a nominal value (noting this
may not be achievable under the
current regulatory environment).
Farmer owners and external investors
could hold shares in the separate
value-add entity.
We removed this option from
further consideration because of
the operational and transitional
complexity it would introduce,
and because of the potential for
misalignment between external equity
and farmer interests, and pressure
to sell down the farmer stake in the
value-add entity over the long-term.
Options that provide
flexibility and retain the Fund
Earlier in the process we considered
options that created more flexibility
but retained the Fund.
These options were a Dual Share
structure with Fund and a Reduced
Share Standard structure with a
larger Fund.
These options were discounted on
the basis that the non-compulsory
investment shares would likely be sold
into the Fund over time, and the Fund
size would grow significantly, risking
farmer ownership and control.
We also explored a 1:2 share standard,
but this was considered unlikely to
provide the level of flexibility required
by farmers and would also likely result
in the Fund size growing significantly,
risking farmer ownership and control.
Are there any
other options
or alternatives
that you think
should have been
considered?
REDUCED SHARE STANDARD
+ Fund
Tradeable
shares
1:2 share
standard
Fund size
capped at
30%
FARMERS
FSF
Units
EXTERNAL
INVESTORS
DUAL SHARE
+ Fund
A
Nominal
supply
shares
B
Tradeable
investment
shares
FARMERS
FSF
Units
EXTERNAL
INVESTORS
SPLIT
CO-OPERATIVE MODEL
A
Nominal
shares
“Core”
B
Tradeable
investment
shares
Separate
value-add entity
FARMERS
EXTERNAL
INVESTORS
B
B
29
5 – THE OTHER OPTIONS CONSIDERED DURING THE REVIEW
6.
Where to from here
THE CONSULTATION PROCESS AND TIMELINE OF NEXT STEPS
We want to hear your feedback. All of
the key information about our review
is set out in this booklet which is
being emailed and delivered to each
supplying farm. You can find further
information and questions and answers
at www.fonterra.com/capitalstructure.
There will be a series of initial meetings
in your regions to discuss this further,
with your Directors and management
representatives leading those discussions.
After that, there will be further
PROCEED WITH
PREFERRED OPTION
(if change is
recommended, then
this will likely include a
shareholder vote)
CONSULTATION
on the preferred
option(s)
REFINEMENT
of preferred
option(s)
CONSULTATIONFURTHER
DEVELOPMENT
of options
FARMER SURVEY
opportunities for discussion and feedback
in your regions – check the Farm Source
website for dates and locations. We
intend to share initial farmer feedback
in July.
Your feedback will inform the next steps
of the review. On the basis it remains
clear that there’s an appetite for change,
the idea is that we’ll do further work to
refine the preferred option(s) and have
a second round of consultation. If we
decide to seek a change to our capital
structure, then you will have a chance to
vote on that change and you will receive a
document with all the detail prior to your
vote. We would likely aim to seek your
vote on direction for change at or around
the annual meeting in November.
As some aspects of our current capital
structure are reflected in the DIRA,
any vote is likely to be conditional on
any necessary changes to legislation
being passed.
CURRENT
PHASE
30
CAPITAL STRUCTURE CONSULTATION 2021
FOR MORE INFORMATION VISIT FONTERRA.COM/CAPITALSTRUCTURE
FIND OUT ABOUT THE REVIEW
This booklet provides you with all the key information you need
to know about the review. You can also find this information via
fonterra.com/capitalstructure
–Come along to a Director meeting near you or join an online
webinar. The webinars will be recorded and made available via the
Farm Source website. You can find dates, times and locations via
nzfarmsource.co.nz/meetings
G E T I N VO LV E D
After the initial Director meetings, we will be running local meetings
and discussion groups. There will be online options as well. These
meetings will be an opportunity to discuss this booklet, what capital
structure means for us, what works, what doesn’t and an opportunity
to ask questions and provide your feedback.
–Come along to a local meeting. You can find dates, times and
locations via nzfarmsource.co.nz/meetings
–Join the online conversation with fellow farmers on the Farm
Source community discussion group on the Farm Source website
via nzfarmsource.co.nz/community
PROVIDE YOUR FEEDBACK
Share your views via the online form at fonterra.com/csfeedback
Alternatively, you can also provide your feedback via any
of the following channels.
1. At a farmer meeting
2. Contact your Area Manager or service team on 0800 65 65 68
3. Email us on cs_feedback@fonterra.com
1
2
3
HOW TO CONTACT US
If you have any questions about Fonterra’s capital structure, contact your Area Manager or
service team on 0800 65 65 68, or email us at cs_feedback@fonterra.com
Directors are also available if you have any questions. Contact details can be found in the back
of any Farm Source Magazine.
31
6 – WHERE TO FROM HERE
IN THIS BOOKLET:
Aggregate Thresholdmeans the threshold set out in the Constitution for dry shares as a proportion of total
shares on issue, being 15%
Boardmeans the board of directors of Fonterra
Constitutionmeans Fonterra’s constitution, as amended from time to time
Co-op, Co-operative or Fonterrameans Fonterra Co-operative Group Limited
Custodianmeans Fonterra Farmer Custodian Limited
DIRAmeans the Dairy Industry Restructuring Act 2001
Dry sharemeans a share held by a farmer owner in excess of the number of shares determined
in accordance with the Share Standard for the season
Economic rightsmeans the rights to receive dividends and other economic benefits derived from a share
held by the Custodian for the benefit of the trustee of the Fund
Farmer ownermeans a shareholder in the Co-op
FSF or Fundmeans the Fonterra Shareholders’ Fund
FSMmeans the Fonterra Shareholders’ Market
kgMSmeans kilogram of milksolids
Market makermeans the registered volume provider who is active in making bids and offers on a
minimum number of shares in the FSM
MyMilk contractmeans the current contract supply option without any requirement to purchase shares,
available to farmers who meet the relevant criteria
Overall Limitmeans the limit set out in the Constitution on the size of the Fund, being 20% of the total
shares on issue
Non-compulsory sharemeans any share that is not required to be held to meet the relevant Share Standard
Sharemeans a co-operative share in Fonterra
Share standardmeans the number of shares a farmer owner is required from time to time to hold as
determined in accordance with clause 3.4 of the Constitution
Share-Up Over Timemeans the contract options to supply Fonterra on the basis that shares are purchased over
time, including strike price contract options
TAFmeans Trading Among Farmers
Temporary Capmeans the temporary cap on the size of the Fund that has been put in place in order to
consult as set out in this booklet by suspending the ability for the economic rights of dry
shares to be sold into the FSF
Wet sharemeans a share held by a farmer owner which is required to be held in accordance with the
Share Standard for the season
Unitmeans a unit issued by the FSF
Vouchermeans a certificate referred to in clause 3.4 of the Constitution that was provided to a
farmer owner on the transfer of the economic rights of a wet share to the Fund under the
2012 and 2013 supply offers to farmer owners, and that can be used by the farmer owner
together with shares, to meet the Share Standard.
7.
Glossary
32
CAPITAL STRUCTURE CONSULTATION 2021
33
7 – GLOSSARY
0800 65 65 68
csfeedback@fonterra.com
fonterra.com/capitalstructure
---
Page 1
• General (Questions 1-10)
• The consultation process and associated temporary measures (Questions 11-24)
• How the review has been conducted and findings to date (Questions 25-28)
• The preferred option (Questions 29-38)
• The other options (Questions 39-44)
1. What does capital structure cover exactly?
• Capital structure can be defined as the way a company manages the balance between its debt and
equity to finance its activities, assets and growth.
• As a farmer-owned Co-operative, we think about other things as well, like: how should the price of
our shares be set; how can we give farmers flexibility with their capital; to what extent should non-
farmers be able to invest in the Co-operative; how much capital do we need to support our strategy;
and more.
2. Why is capital structure important?
• Getting our capital structure right is important to helping ensure our financial sustainability.
• It supports our purpose, strategy, performance and ability to maintain farmer ownership and control
over the long term.
• It plays an influential role in key areas of our business such as maintaining a strong balance sheet
and enabling us to be resilient to shocks.
• It also directly impacts individual farming businesses – from how flexible farmers can be with their
capital to how much they’re getting as a return on investment, and much more.
3. When did the capital structure review start and what is its objective?
• The groundwork for our capital structure review was laid in late 2019, after our strategy refresh.
• Alongside the refreshed strategy, the Board has spent a significant amount of time reviewing our
Co-operative’s capital structure.
• The objective is to have a capital structure that helps ensure our financial sustainability well into the
future so we can deliver value for this generation and the next.
• This has led the Board to focus on two main areas: maintaining a sustainable milk supply and
protecting farmer ownership and control.
4. When it comes to milk supply, isn’t performance more influential than structure?
• To a certain degree, strong performance does help us maintain a sustainable milk supply and we will
continue to focus on performance.
Page 2
• But if increased performance increases the share price, it becomes harder for new farmers to buy
shares to join the Co-operative, and it can be a key factor for existing farmers in their decision to
leave, so they can sell their shares and free up capital.
• See more about how we think our capital structure is tilting the playing field against us in Section 4 of
the Consultation Booklet.
5. Why is farmer ownership and control so important?
• We inherited our Co-operative from generations of farmers before us who knew that they could
achieve much more by working together, rather than working alone.
• The role of a co-operative is to give farmers control of their own destiny.
• Farmers know that our Co-operative will collect their milk and work hard to ensure they receive the
best possible price for it. Maximising overall wealth of our shareholders is at the core of Fonterra’s
purpose.
• Having a strong farmer-owned co-operative in our dairy industry is important to every New Zealand
dairy farmer, and for the country as a whole.
• Our milk price sets a benchmark in New Zealand, so even those who don’t supply the Co-operative
benefit from it.
• It’s also clear from farmer feedback that ownership and control is their number one priority.
• See the inside cover of the Consultation Booklet for more details.
6. What stage is the review at?
• We are currently consulting with farmer owners on potential options to change our capital structure.
• Farmers have the chance to share their views through a series of meetings, webinars and other
opportunities.
• No decisions have been made on changes, and we’re taking the time needed to consult and
consider farmer feedback before moving to the next stage.
• Further details on the milestones are included in Section 6 of the Consultation Booklet.
7. Why is the Board proposing potential changes?
• The review has highlighted that there are elements of our current structure that are challenging for a
number of farmers now, or that may create challenges for our Co-operative in a flat or declining milk
supply environment. These are explained in more detail on pages 4-5 and 22-23 of the Consultation
Booklet.
• At a high level, the Board believes it’s time to evolve the Co-operative’s capital structure because:
o The environment the Co-operative is operating in has changed, particularly around milk supply.
o The level of investment to be part of the Co-operative is challenging for a number of farmers.
o If we provide more flexibility for farmers the Fund size could grow significantly and, based on the
scenarios included on page 22 of the Consultation Booklet, the thresholds that were put in
place to help protect farmer ownership and control could be exceeded within the
next few seasons.
o The Fund size could also grow if milk supply declines.
o To stay within the Fund size thresholds, our Co-operative would need to take action – such
as buying back shares or units. Buy-backs create an uncertain demand on our capital, potentially
impacting our ability to invest in strategy and growth. Conceivably, buy-backs could cost
shareholders up to $1.2 billion over the next ten seasons. An alternative would be
increasing the thresholds to allow a greater degree of external investment. The Board doesn’t
think either of these are ideal outcomes.
• We’ve evolved our structure before, and it’s important we keep evolving it as things change.
• Exactly how our capital structure evolves is what we are consulting with farmers on.
8. Why now?
• We appreciate that there is a real sense of optimism in the Co-operative with our improving financial
performance. But the issues raised through this review need to be addressed early.
• Acting now gives farmers more choice. For example, at the current share price and Fund size, our
farmers have the ability to make a decision about the future of the Fund. If the Fund size grows, then
this may no longer be an option for the Co-operative.
Page 3
• Acting now also means we can better consult with farmers.
9. The Co-operative has been selling a number of assets and has a stronger balance sheet –
therefore what is wrong with buy-backs in the future?
• Buying back shares or units is one potential option to stay within the constitutional thresholds if milk
supply declines to the extent suggested by the scenarios included in the Consultation Booklet.
• While it could potentially be accommodated, it would put an uncertain demand on our capital in
the future and potentially impact our ability to invest in strategy and growth.
• And, buy-backs don’t address the lack of flexibility for farmers that our current structure creates.
• It is also worth noting the other impacts that come along with declining milk. This could include the
potential for reduced scale efficiencies across milk collection and manufacturing operations or an
ongoing requirement to continually right-size our operations.
10. What are the potential options for change?
• The Board has spent a significant amount of time looking at a wide range of options, including
staying with the current structure. Some of the alternative structures considered include:
o dual share structures, which would move from the current single Co-operative share to a
compulsory supply share and a separate non-compulsory investment share
o unshared supply structures
o a traditional nominal share structure
o a split co-operative model
• All options are explained in the Consultation Booklet, which has been sent to all Fonterra farmers.
• After its analysis to date, and to help give the conversations with farmers some structure, the Board
has shared a preferred option – “Reduced Share Standard with either No Fund or a Capped Fund”.
• This indicates current thinking, but the Board remains open minded about adjusting that direction
based on farmers feedback.
11. How can farmers have their say and when do they need to do this by?
• There are multiple ways farmers can share their views.
• One of the options is via the online form at Fonterra.com/csfeedback.
• Other channels include face-to-face farmer meetings or webinars (schedule available here) or by
contacting their Director, Area Manager or the service team on 0800 656568 or emailing us at
csfeedback@fonterra.com. All the details are provided in Section 6 of the Consultation Booklet.
• We’re looking to gain as much feedback as possible by the end of June, as we intend to share initial
farmer feedback in July.
12. What main areas are you looking for feedback on during consultation?
• The Board has outlined on page 9 of the Consultation Booklet its current thinking on how its
preferred structure could work.
• This has been done after looking at different options for some of the features, such as the 1:4 share
standard, the 4x cap on shares, associated voting rights and more.
• We are particularly keen to hear farmer views on these points over the course of the consultation
process, as well as the key considerations outlined on pages 12-13.
• The Board is also open to feedback on any of the other options that have been considered.
13. What are the next steps and when is the review likely to conclude?
• Once we hear farmer views, and if the appetite for change remains, we would do further work to
refine the preferred option(s) and have a second round of consultation.
• If the Board decides to seek a change to our capital structure, the likely aim is to hold a farmer vote
around the time of the Annual Meeting in November. The approval of 75% of votes from voting
farmers would be required.
• If the preferred outcome is to buy back the Fund, it would also require the approval of 75% of votes
from voting unit holders.
Page 4
• As some aspects of our current capital structure are reflected in DIRA, any vote is likely to be
conditional on any necessary changes to legislation being passed.
14. Why was it necessary to temporarily cap the size of the Fund before starting consultation?
• This is not a decision we made lightly. It was clear from the outset that consultation for this review
would be more challenging than last time because both shares and units in the Fund are traded
securities and we need to comply with continuous disclosure rules.
• As we progressed the review and started looking into options that included buying back the Fund, we
identified a risk that, if we started consulting on options for change without temporarily capping the
Fund, the Fund size could have grown significantly and taken the option of buying back the Fund off
the table before farmers had a chance to consider it.
• Some of the options have the potential to see differences emerge between the price at which a share
trades in the FSM compared to what a unit in the Fund trades at, with units trading at a higher price
than shares.
• If the temporary cap was not in place, anyone holding dry shares would be able to exchange them
into units in the Fund. This could more than double the size of the Fund and make options that
include buying back the Fund unaffordable in the context of our current balance sheet targets.
• The temporary cap was a necessary step to keep all of our options for change open while we have a
free and frank conversation as owners.
15. How will the FSM and Fund work during the temporary cap?
• The temporary cap means that shares can no longer be exchanged into units. Farmers will be free to
buy and sell shares in the FSM and anyone holding units in the Fund, which may include farmers,
will be free to continue buying and selling units on the NZX or ASX.
16. What is likely to happen to the price of farmers’ shares and unit holders’ units during the
consultation process when the temporary cap is in place?
• The prices for units in the Fund and shares in the FSM may not be as closely aligned as they have
been to date.
• Even if a price difference does emerge, given that no additional shares have been issued, the Co-
operative’s value on a per share basis has not been diluted.
• It’s important to note that pricing of shares under the temporary cap may not reflect pricing of shares
in a farmer-only market during normal trading. In other words, what we see during this temporary cap
might be different to what we could see if farmers decided to move to a structure with a farmer-only
market.
• This is because share standard compliance obligations are on hold for farmers holding at least 1,000
shares during the temporary cap, so there may be lower levels of trading. Plus, because we are
consulting on potential changes, there is a degree of uncertainty about our future capital structure.
• The market maker, or registered volume provider, that has been active in making bids and offers on
a minimum number of shares in the FSM and the Fund since our current structure was implemented
will continue to operate in the FSM during the temporary cap. However, the share price could move
more on small volumes of trading.
• If the Board’s preferred structure of a Reduced Share Standard with either No Fund or a Capped
Fund were to be implemented, then the current uncertainty would no longer exist – some farmer
owners would be required to trade shares to at least comply with the Reduced Share Standard and
some farmer owners may choose to buy shares over and above their individual minimum
requirements.
• See page 12 of the Consultation for further details on the impacts of a farmer-only market.
17. What does putting compliance obligations on hold during consultation mean for farmers?
• This means that all supplying farmers holding a minimum of 1,000 shares will not be required to buy
or sell shares to meet the share standard for the 2021/22 season until a later date to be advised.
• Compliance obligations are also temporarily on hold for those farmers who have not yet met their
Share Standard compliance obligations for the current 2020/21 season. This is so that no farmers
are required to trade for compliance purposes during the temporary cap, until a date to be advised.
Page 5
18. What about farmers on a Share-Up Over Time Contract?
• These farmers will also not be required to buy or sell shares to meet their relevant share up
requirements for the 2021/22 season until a later date to be advised, as above.
• For farmers whose final year of their Share-Up Over Time contract is 2021/22, they can still submit a
cease notice for the following 2022/23 season, even if they will not have fully shared up due to
compliance obligations being on hold.
19. What happens to delegated compliance trading?
• With compliance obligations on hold for all farmers holding a minimum 1,000 shares, delegated
compliance trading will not be offered for this season. If a date for compliance is advised in
accordance with the above, then delegated compliance trading will likely be offered at that time.
20. If compliance obligations are on hold why have you set a Compliance Date of 20 April 2022?
• Our Constitution requires a Compliance Date to be set before the start of each season. The formal
Compliance Date for the 2021/22 season has been set as 20 April 2022, which is consistent with
previous seasons. However, as explained above, farmers holding a minimum of 1,000 shares will not
be required to comply with the Share Standard until a date to be advised.
21. What does putting the purchase of units under the Contract Fee for Units Trust on hold
during the consultation process mean for farmers?
• Under the Contract Fee for Units trust, the contract fee paid by a farmer under a Share-Up Over
Time contract, or supplying MyMilk, is transferred to a trust and used to purchase units which are
held on trust for the relevant farmer. Those units are then distributed to the farmer when the farmer
needs to share-up under the contract, or for MyMilk suppliers, when they need to acquire shares to
supply the Co-operative.
• The Contract Fee for Units Trust is a discretionary scheme we offer. The Trustee will continue to
hold the 5c/kgMS contract fee on trust for the relevant farmers but given the consultation on capital
structure changes, the Trustee will not apply that 5c/kgMS to purchase units to hold on trust for the
relevant farmers.
22. What happens to the Contract Fee?
• The Contract Fee is set each season. It was set at 5c/kgMS for the current season and has also
been set as 5c/kgMS for next season. It will continue to be deducted from milk payments for next
season, and will be held on trust under the Contract Fee for Units Trust. However the purchase of
units by the Trustee has been put on hold until a date to be advised by the Board.
23. How open is the Board to changing its preferred direction of travel based on feedback
received during consultation?
• The preferred option indicates current thinking, but we are open minded about adjusting that
direction based on farmer feedback on all of the options.
24. What will you do if this goes to a farmer vote in November but it is not passed?
• We have no preconceived outcome and it may be that this review results in no changes.
• No decisions have been made on any change, and we are taking the time we need to consult with
farmer owners and consider feedback before moving to the next stage.
25. What has the review involved to date?
• The Board started by identifying what the key elements of a financially sustainable Co-operative are
and developing a set of design principles. These were shared externally after our annual results in
September 2020 and are included in Section 4 of the Consultation Booklet.
• The wide range of alternatives were assessed and prioritised based on how well they met
the objectives of the review and the design principles.
Page 6
26. How were farmer views taken onboard?
• While we would have liked to have been out on the road discussing options with farmers earlier, we
have gained useful insights from farmer workshops on capital flexibility that were held in 2019, the
roadshows after annual results and interim results, a phone survey we did in December 2020 of a
representative sample of 350 farmer owners, as well as the online survey available to all
farmers from January to February 2021 where we had around 1,800 responses.
27. What views did farmers express before the consultation process kicked off?
• The online survey results confirmed that there is an appetite for change, with 62% of respondents
either strongly or slightly supporting a change.
• The results also gave us an insight into what farmers consider are the main priorities in any potential
structure. These are outlined in Section 4 of the Consultation Booklet.
28. What were the findings to date?
• The review has highlighted that there are elements of our current structure that are challenging for a
number of farmers now, or that may create challenges for our Co-operative in a flat or declining milk
supply environment.
• These are explained in more detail on pages 4-5 and 22-23 of the Consultation Booklet.
29. Why has the Board decided to put forward a preferred option?
• After its analysis to date, and to help give conversations with farmers some structure, the Board has
put forward a preferred option – a “Reduced Share Standard with either No Fund or a Capped Fund”.
• The Board arrived at this point after reviewing a wide range of capital structure options from co-
operatives around the world – both within and outside the dairy sector – as well as options to evolve
our current structure.
• This indicates their current thinking, but the Board is open minded about adjusting that direction
based on farmer feedback on all of the options.
30. What are the key benefits and trade-offs of this option?
• Based on the work to date, the Board believes the preferred option would help us address the
challenges we face today and those we are likely to face in the future, better enable the delivery of
our refreshed strategy and help us build a more financially sustainable Co-operative.
• It would give farmers more flexibility, while ensuring farmer ownership and control is protected.
• A key outcome of this change is that shares would be bought and sold between farmers in a farmer-
only market. We want to be clear that we expect this change to impact the price at which shares in
the Co-operative are traded, and that there may not be as much liquidity in the market.
• Ultimately, the price of our shares would be determined by the performance of our Co-operative and
trading between farmers.
• Currently our share price moves in line with the price of units in the Fund. In that sense it is
influenced by unit holders, who have a different investor profile to that of us farmers – a farmer’s cost
of capital is typically higher.
• To cater for share flexibility, some farmers would inevitably have more shares than others. We
believe this is a more sustainable proposition over the longer term than the alternatives we are
confronted with.
• See Section 3 of the Consultation Booklet for more information on the preferred option.
31. The Co-operative already has tools like MyMilk and Share-Up Over Time Contracts – don’t
these provide enough flexibility for farmers?
• These options provide support for new farmers joining the Co-operative, but they do not provide
flexibility for existing farmers. We know that the high compulsory cost of investment is a key factor in
farmers’ decisions to leave.
Page 7
32. What would the main differences be between No Fund and a Capped Fund?
• Removing the Fund would involve an offer by Fonterra to unit holders to buy back their units at a
fixed price. The approval of at least 75% of unit holders entitled to vote and voting would be needed
for the offer to be accepted. The offer amount would need to be acceptable to unit holders, fair to
farmers and would need to make more sense to the Co-operative than the Capped Fund
alternative.
• A Capped Fund would involve the Fund remaining part of Fonterra’s capital structure and listed on
the NZX/ASX, but with one key change in that farmer owners would no longer be able to sell any
further economic rights of shares into the Fund. Shares would be tradeable in the FSM only.
• Members of the public could continue to trade units in the NZX/ASX, with units continuing to receive
distributions in line with our performance. Farmer owners would also still be able to exchange any
units they hold for shares in the FSM.
• It would mean that the size of the Fund as a proportion of our Co-operative could not increase
materially, but it could decrease if farmer owners exchange units they buy or hold into
shares. Fonterra could also potentially buy it back in the future – partially or fully.
• See page 8 of the Consultation Booklet for more details.
33. Does the Board have a preference for No Fund or a Capped Fund? If so, why?
• We have reached a preliminary view that having No Fund would be preferable to a Capped Fund
because it simplifies our Co-operative.
• However, if we cannot reach an acceptable arrangement to buy back the Fund that 75% of voting
unit holders support, then a Capped Fund would also work.
• In other words, we would only seek to remove the Fund at a reasonable price that was acceptable to
unit holders, fair to farmer owners and made sense to the Co-operative compared to the Capped
Fund alternative.
34. Why is the preferred option considered better than the Co-operative’s current structure and
other potential alternatives?
• The Board prefers the Reduced Share Standard structure over the other options, including staying
with our current structure, for several reasons.
• Overall, we think this structure measures well against the design principles for the review while
remaining aligned with our Co-operative Principles.
• It provides greater flexibility for farmers, which we think will better support a sustainable milk supply
for Fonterra so that we can continue to operate efficiently.
• It also helps protect farmer ownership and control, which in turn protects our interests as suppliers.
• It still requires all suppliers to become farmer owners with capital-backed supply, and all farmer
owners would still have exposure to both milk price and some earnings.
• It is preferable to a Dual Share structure at maintaining a strong balance sheet for our Co-operative.
This is a high priority for us and was also reflected in farmer feedback. This is because retaining a
single share would mean that all share capital is rated as equity (which would not be the case under
a Dual Share structure where one of the shares may be partially classified as debt by ratings
agencies).
• We also think it would be more straight forward to implement than other options.
• No structure is perfect. All options involve trade-offs. What we’re not willing to trade off is farmer
ownership and control that protects overall returns – including milk price and dividends.
• While we know that moving to a farmer-only market may have implications for the price of farmers’
shares, we believe maintaining farmer ownership and control of the Co-operative is worth this trade-
off.
35. How might the preferred option better support the delivery of the Co-operative’s strategy?
• New Zealand milk is at the heart of our strategy – everything starts there. We need a sustainable
milk supply in order to execute our strategy.
• We believe that the Reduced Share Standard with No Fund or Capped Fund would create greater
flexibility for farmers to better support a sustainable milk supply for the Co-operative.
• It also protects farmer ownership and control, including the maximum sustainable milk price for
farmers over the long term.
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• If we stay with our current structure and milk supply declines to the extent suggested by the
scenarios included on page 22 of the Consultation Booklet, then the actions we would expect to have
to make – such as continually funding buy-backs – would mean that resources would not be entirely
focussed on delivering our strategy.
36. How much would it cost to buy back the Fund?
• The exact cost is uncertain at this stage but capping the Fund size removes the risk that the Fund
size grows and significantly increases the total cost.
• We would need to reach an acceptable arrangement that 75% of voting unitholders support.
• We would only seek to remove the Fund at a reasonable price that was both acceptable to
unitholders and fair to farmer owners.
• We would view a buy back more as an investment than a cost.
37. Could the preferred option potentially result in too much concentration in ownership?
• The Reduced Share Standard structure, with the minimum requirement set at 1:4, is intended to
provide meaningful flexibility for farmers to reduce their shareholding while ensuring there is
sufficient ability for other farmers to hold a greater number of shares without giving rise to a
significant concentration of ownership.
• A different ratio of say 1:10 that allowed farmers to lower their share ownership even further would
mean the 4x cap would need to be higher so that there would be enough buyers in the farmer-only
market. This could potentially give rise to too much concentration in ownership with a small group of
farmers.
• When it comes to voting rights and the potential for concentration of ownership, it’s important to note
that because voting rights would be “per 1,000 kgMS backed by shares”, a farmer who continues to
hold shares on a 1:1 basis relative to their supply in the previous season will retain the same voting
entitlement as today, and a farmer who holds additional shares over the 1:1 basis (up to the
maximum shares at 4x kgMS supplied) would only have voting rights up to the 1:1 level, not their full
shareholding.
• During consultation, we welcome farmer views on whether there should be any other mechanisms to
support greater alignment between farmers.
38. What would happen to MyMilk and Share-Up Over Time contracts?
• Share-Up Over Time and MyMilk contract supply options would be phased out (although all existing
commitments would be honoured).
39. Couldn’t the Co-operative stay with the current structure and buy back shares or units in the
future if milk supply declines?
• Buying back shares or units is one potential option to stay within the constitutional thresholds if milk
supply declines to the extent suggested by the scenarios in the Consultation Booklet.
• While it could potentially be accommodated, it would put an uncertain demand on our capital in
the future and potentially impact our ability to invest in strategy and growth.
• And, buy backs don’t address the lack of flexibility for farmers that our current structure creates.
• It is also worth noting the other impacts that come along with declining milk. This could include the
potential for reduced scale efficiencies across milk collection and manufacturing operations or an
ongoing requirement to continually right-size our operations.
40. What would the Dual Share option with either No Fund or a Capped Fund look like?
• This involves moving away from our current single Co-operative share to a structure with two classes
of shares – a compulsory supply share and a separate non-compulsory investment share.
• As with the Reduced Share Standard structure, the Dual Share option would give more flexibility to
farmers but also has the potential for the existing constitutional thresholds to be exceeded if we took
no action in relation to the Fund, as the investment shares could move into the Fund over time.
• That’s why we would need to either buy back the Fund or cap the size of the Fund.
• See Section 5 of the Consultation Booklet for more details.
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41. What are the key benefits and trade-offs of this option?
• This option gives farmers the ability to choose whether or not to invest in the Co-operative beyond
milk supply and the associated compulsory supply shares.
• Because the supply share would carry a nominal price, this price would not fluctuate over time. This
means that those farmer owners that choose to hold only supply shares would not carry any risk of
movements in the Co-operative share price over time.
• Farmer owners would not be required to hold any investment shares and could therefore choose
to remove most of their exposure to earnings performance.
• Features such as the nominal value for the supply share and the cap on investment shares could be
changed over time. In addition, the dividend on supply shares, voting rights and the time frames for
sharing up and selling shares on exit could be set differently.
• The impacts of a farmer-only market outlined on page 12 of the Consultation Booklet under the
Reduced Share Standard structure would also apply to this Dual Share option.
42. Why did this option not end up being the preferred one?
• The key reasons why this is not our preferred option are:
o The supply share is likely to be treated as a half debt and half equity (“hybrid”) instrument by
the rating agencies that review Fonterra’s financial strength, and as debt for accounting
purposes. This means that it would reduce the Co-operative’s balance sheet capacity by
around $750 million (or potentially $1.5 billion if it is rated as all debt), which could limit
our financial flexibility over time.
o A Dual Share structure could result in less alignment among the Co-operative’s farmer
owners than a Reduced Share Standard structure. Farmer owners that choose to only
hold supply shares may be more interested in investment in activities that are milk price
focussed with less interest in value-adding strategies and investments. On the other
hand, those farmer owners with a large proportion of investment shares may be more aligned
with business decisions that drive earnings.
o As there would be no requirement for farmer owners to hold investment shares, there may be
less liquidity in farmer-only market than under a Reduced Share Standard.
o A Dual Share structure is likely to be more complex to transition to and operate over time.
43. What other options has the Board considered?
• Some of the other options that were considered earlier in the review include unshared supply
options, traditional 'nominal share' options or options that split the Co-operative.
• These are explained in more detail on pages 28-29 of the Consultation Booklet.
44. Why did those other options not get prioritised?
• Farmer views helped narrow down the options. The Board prioritised two they thought could best
meet the objectives of the review for a closer analysis. That closer analysis resulted in the Board
putting forward a preferred option.
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.
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