Farmer feedback to shape revised capital structure proposal

19 July 2021

Farmer feedback set to shape revised capital structure proposal

With the first phase of Fonterra’s capital structure consultation now complete, the Co-op is drawing up a
revised proposal that aims to reflect farmers’ views.

A number of changes are being considered to the preferred option initially put forward in the
Consultation
Booklet in May – including adjusting the proposed minimum shareholding requirement for farmers and
enabling sharemilkers and contract milkers to own shares.

“It’s a good time for the Board to step back and reflect on the feedback as most farmers will now be busy
with calving. Once they’ve come through this particularly busy time of the season, we’ll be ready to
consult on the updated proposal,” says Chairman Peter McBride.

Consultation has been extensive to date, starting with the initial communication on 6 May
and the
Consultation Booklet being sent to every farmer owner. Since then:

• Directors have held 90 farmer meetings, attended events such as the My Connect conference
and Field Days as well as leading 7 online webinars and speaking with many farmers directly.
• Over 5,000 farmers have directly engaged through feedback channels, in addition to discussing
the options with each other.
• Members of Fonterra’s Board and management have also been talking with other groups such as
the Co-operative Council (formerly the Shareholders’ Council), the Fonterra Shareholders’ Fund,
the Government, major banks and rural professionals. This engagement will continue as the
consultation progresses.

“We would like to thank our farmer owners for getting involved and approaching the consultation with
open minds,” says McBride.

“We also want to acknowledge the uncertainty that comes along with us considering changes to our
capital structure and the significant challenges that it’s creating for some farmers. The best way to give
certainty is to ensure we have a full discussion as a Co-op and get to a quality outcome.

“The Board maintains its belief that, in a flat or potentially declining milk environment, making changes
early will put us in the best position to provide farmers with more flexibility while protecting farmer
ownership and strengthening our Co-op’s financial sustainability.”

Summary of farmer feedback

Many farmers said that additional information on the Co-op’s business strategy and future performance
would help them form a clearer view on capital structure.

Fonterra Co-operative Group
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“In August and September, we will provide further information on our long-term strategy including the
types of activities we will invest in, the returns we are targeting, and the measures against which we will
track our progress.”

McBride says farmers’ views have been varied and heartfelt, but with some clear themes coming through.

“We will seek to cater for the diversity within our ownership base, but it is impossible to incorporate every
piece of feedback. As a Co-op, we need to be pragmatic and open to compromise in order to find a way
forward together that is in our best long-term interests.”

A summary of the feedback as well as a high-level overview of alternative proposals submitted by farmers
is available at www.fonterra.com/capitalstructure
.

Proposed areas for change

The Board is considering a number of changes as it thinks about what a final proposal could look like.
These include:
• Setting the minimum shareholding requirement at 33% of milk supply (or 1 share per 3 kgMS),
rather than 25% (or 1 share per 4 kgMS) as originally set out in the preferred option.
• Enabling sharemilkers and contract milkers to hold shares if the Co-op moved permanently to a
farmer-only market.
• Extending the entry timeframe from five to six years.
• Extending exit timeframes for all farmer owners on the date of the vote to up to 10 or 15 years,
including those who have already ceased in the past few seasons but who still hold shares.
• Reviewing the market maker role and looking further at how potential share buy-back options
might support liquidity in a farmer-only market.
• Maintaining the share maximum at 4x milk supply to also help support liquidity.

“We have also reconsidered voting rights in light of some feedback and at this stage our preference is for
voting to continue to follow share-backed supply as it currently does,” adds McBride.

Next steps for consultation

Fonterra is committed to moving as quickly as it can through the capital structure review while also taking
the time needed to consider all views.

Over the next couple of months, the Co-op plans to do surveys and hold focus groups to ask farmers
specific questions and test different aspects of the potential changes.

“This will help us as we continue to develop a more detailed proposal to present to farmers around the
time of our annual results in late September for further consultation. At this stage, we are still aiming for a
farmer vote at our Annual Meeting, which will be held in December.”

Further information is available at www.fonterra.com/capitalstructure


Attachment
• Presentation

ENDS

For further information contact:

Fonterra Communications
24-hour media line
Phone: +64 21 507 072

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3
•
•
Proceed with Preferred
Option
(if change is recommended, then
we would aim to hold a
shareholder vote at the Annual
Meeting in December)
Further Regional
Meetings
Review
Feedback &
Refine Option(s)
Further
Consultation
Director
Meetings

4
Director-led farmer meetings
held across the country
farmer webinars
with an average
of around
attendees
at each
of written responses
received from farmers
farmers have directly engaged
through feedback channels to date
Over

5

6

7
•
•
•
•
•

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•There's a lot of discussion around the challenge of protecting farmer ownership
and impacts on the share price.
•There’s support for a market where the share price is ultimately determined by the
Co-op's performance and farmers’ assessment of that. But there are also concerns
about the share price impacts of a farmer-only market, including whether there’s
enough depth in the market when it comes to buyers and sellers of shares.
•There’s a clear call for more information on business strategy and future
performance.
•Farmers are also keen for more information around how a permanent farmer-only
market would operate.
•There’s no clear preference from farmers on the future of the Fund. There have
been suggestions that instead of buying back the Fund, Fonterra should consider
buying back shares to reduce the overall shares on issue.
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•We have heard support for the concept of giving all farmers some level of
flexibility with their shareholding at any point of their farming career.
•There are a range of views on how to strike the right balance between flexibility
and ensuring farmers still maintain a strong capital commitment to the Co-op.
•Many farmers have shared that moving from a 1:1 to a 1:4 Share Standard
may be a step too far, with a lot wanting to retain a 1:1 Share Standard.
Farmers proposed other ways of making it easier for new farmers to join the
Co-op, including increasing the time to share-up and making loans available.
•Questions were raised about potential misalignment within the farmer-base
between those who would choose to sell down some of their shareholding and
be less exposed to earnings, and those who would want to invest more in the
Co-op. Some farmers would like to see more detail around how we make sure
the Co-op stays aligned if we reduced the minimum shareholding
requirements.
•We’ve had some feedback around voting, including whether voting should be
based on share-backed supply or milk solids.

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•We’ve heard a lot from farmers about the need to recognise the loyalty of
Co-op members.
•This has led to many conversations about the appropriate length of time we
could allow farmers to share-down when they retire or leave the Co-op.
Related to this, there has been feedback from some farmers that we need to
make sure that the proposals cater for retiring farmers who have been part of
the Co-op for many years.
•We’ve also had some feedback on making sure that any new structure works
for sharemilkers and contract milkers. We’ve heard from farmers who would
like to see opportunities for them to participate in the farmer-only market.

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•We received ideas for multiple variations within the
different options presented, including a number of
alternative proposals provided as written submissions.
•A huge amount of time and effort has gone into
developing some of these proposals, and we really
appreciate these ideas.
•All the proposals have been worked through in detail
and there are some aspects that we are considering as
we work towards a final proposal.
•High-level summaries are provided at
www.Fonterra.com/CapitalStructure, with similar
proposals grouped together for simplicity.

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Minimum shareholding requirement of 1 share per 4
kgMS or 25% of supply
Minimum shareholding requirement 1 share per 3 kgMS
or 33% of supply
Maximum shareholding of 4 x supplyMaximum shareholding of 4 x supply (no change from May)
5 years to enter6 years to enter
5 years to exit10 -15 years for current shareholders
Farmer-only market
Sharemilkers and contract milkers can also buy, hold and
sell shares in the farmer-only market
Possible share buy-back options
Voting based on share-backed supplyVoting based on share-backed supply (no change from May)

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•Share Standard and Minimum Shareholding Requirement: We are reconsidering the
proposed reduction to the Share Standard. Instead, the Share Standard could stay at 1 share for
every kgMSsupplied, and the minimum shareholding requirement could be set at 33% of that
Share Standard (or around 1 share / 3 kgMS). This better respects the principle of shareholder
alignment, but still provides flexibility for those who need it at different points in their farming
career.The 33% also reflects the feedback from many of you that 1:4 (25%) is too far too fast.
•Maximum Shareholding: We are not looking to lower the cap of 4 x supply to support liquidity
in the market.
•Entry: We are considering extending the entry timeframe from five years to six years, with no
obligation to purchase more than 1,000 shares in the first year.
•Exit: We are also looking at extending exit timeframes for all farmer owners on the date of the
vote to up to 10 or 15 years, including those who have already ceased in the past few seasons
but who still hold shares.
•Farmer-only Market:
•We are looking at allowing sharemilkersand contract milkersto participate in the farmer-
only market and hold shares in the Co-op.
•We are also reviewing the market maker role and looking further at how potential share
buy-back options might support liquidity in a farmer-only market.
•Voting Rights: We have reconsidered voting rights in light offeedback from some of you and at
this stage our preference is for voting to continue to follow share-backed supply as it currently
does under the Constitution.

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
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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
Feedback &
Refine Option(s)
Further
Consultation
Director
Meetings