KEY POINTS:
A stock market listing for co-operative dairy giant Fonterra would be hard to sell to farmer owners, says Dairy Farmers of New Zealand.
Fonterra chairman Henry van der Heyden yesterday refused to comment on speculation that the dairy company had settled on two options as part of its capital structure review - both involving a partial listing.
In a statement van der Heyden said he was sticking to a promise not to discuss the review publicly before talking to farmers.
Fonterra's board is expected to present capital structure options and its preference at a special shareholder meeting in November.
Dairy Farmers chairman Frank Brenmuhl said feedback from farmers was that they would need a very good reason to devolve any control of Fonterra.
"There would need to be more than just a dollar in it because the reason why Fonterra is New Zealand's biggest company is because it has been a co-operative," Brenmuhl said.
Splitting out part of Fonterra into a separate business could create mixed loyalties, he said.
A separate brands business might find the easiest way to boost profits was to reduce the costs of its inputs, he said.
"In this case the major input is milk so farmers are always nervous when you run into that kind of scenario."
It was too early to say whether a radical change to the capital structure of Fonterra could win the support of farmers, Brenmuhl said.
"When payouts are good farmers are more likely to vote for the status quo," he said.
Fonterra's payout last season was $4.46 per kilogram of milk solids, with a record forecast payout of $6.40 this season.
The NZX - which has seen several bigger companies depart in the past five years - would likely welcome any form of listing by Fonterra.
New Zealand Exchange head of markets Geoff Brown said the NZAX had to be developed so a wider range of organisations could come to market.
"Specifically when we looked at that the co-op sector was one of the things which was an obvious standout. The rural sector is not that well represented and anything that we can do that sees an increase in the number of rural companies that are listed would be of benefit."
National Bank rural economist Kevin Wilson said three main alternatives available to Fonterra included keeping the co-operative in its current form, possibility with internal tradeable shares for farmers, and developing a new generation co-operative with two classes of shares - one for farmer ownership and another for investors.
"So you have some tradeability but you firmly retain control."
A third option was some form of market listing, he said.
The key issue for Fonterra was one of shareholder choice - did farmers want a global food business or at the other end of the scale a New Zealand-based commodity co-operative?
"If they don't want to grow as fast or don't want to grow any further then arguably the need for additional capital is substantially reduced," Wilson said.
Often companies did not make changes until they were in crisis "but some of the underlying issues here appear to be big enough that they need to be addressed regardless of what the payout is", he added.
Fonterra had built very little buffer of permanent capital - usually used by co-operatives to manage redemption risks.
"You build permanent capital by retaining profits and Fonterra in its history so far have basically paid out most of the profit as milk price," Wilson said.
