KEY POINTS:
Farmers have some major concerns about Fonterra's sharemarket listing plan which the dairy giant will have to settle as it starts a two-year consultation.
The board of the farmer-owned co-operative this week announced a proposal to set up a new company to hold all of Fonterra's assets and operations, which could be listed in 2010.
Dairy Farmers of New Zealand chairman Frank Brenmuhl said opinion among farmers was divided.
"Some smaller farmers, or ones which have got family farms, are not necessarily leaping up and down and saying this is a good thing but I've spoken with some corporate farmers who believe it's a very good thing," Brenmuhl said.
The co-operative would at first retain a 65 per cent stake in the new company, farmers would be given a further 15 per cent and 20 per cent would go to the public.
Two shareholder votes are needed, each with 75 per cent approval - one next year to change to the two-entity structure and introduce a more transparent milk-price system, and another in about 2010 to decide whether Fonterra would list.
Meetings due to be held in February - about three months before the first vote - to discuss milk pricing are later than Brenmuhl would have liked.
"For a publicly listed company the way you increase your profits is to decrease the cost of your inputs, and the input for Fonterra Limited is milk," he said.
"So farmers will need to be assured that they're not driving the milk price down."
Other questions included redemption risk - the need to pay out farmers when they cash in shares acquired to be part of the co-operative.
"If all the assets of Fonterra Co-operative have been transferred to Fonterra Limited, what assets has the co-operative then got to actually pay out redemptions?" Brenmuhl asks.
Reducing the risk of redemption was a driver for the capital structure review, along with ensuring accessto capital for global growth andproviding more investment choice.
How the value of stock market-driven shares in the listed company would relate to the shares of farmers in the co-operative was another issue.
This would also be discussed at meetings in February with the milk price.
"If something happened and shares went to, say, $16 for Fonterra Limited because people got enthusiastic about the potential, what would that do to the cost of entry to dairy farming?"
Dairy Farmers would do its best to stimulate discussion and Brenmuhl congratulated Fonterra on how it had set about creating an open process.
"It's up to farmers now to make sure that the questions they need answers to, that they go out and seek those and that they also seek the opinions of others," he said.
Farmers would have to decide whether the co-operative's strategy for global growth was what they wanted, Brenmuhl said.
"Is the cost of that worth it to farmers?"
Fonterra director John Wilson said there had been much talk in the boardroom about the tension around the milk price.
"The argument runs that farmers will always want the best price at the farm gate, while investors will always want to drive milk prices down in favour of maximising their dividends," Wilson said.
"Regardless of what capital structure option we introduce, we must ensure the milk price is transparent and robust for our supplier shareholders."
Fonterra chairman Henry van der Heyden said a number of capital structure options had been considered, two closely, but the preferred choice best dealt with the three main objectives.
"The board's preferred capital structure option is the only option that we believe would allow us to implement our growth strategy," van der Heyden said.
Fonterra's farmer directors had been consumed with making sure farmers kept control of the company and that the essence of the co-operative was retained, he said.
"During the next six months of the consultation process we are very open to refinement and amendments from our farmer shareholders. This is ultimately their decision."
Shareholders' Council chairman Blue Read said the council had supported the need for the review.
"But I need to be clear the council has not yet formed a position on the preferred capital structure option," Read said. "As we go through the consultation process the council will be looking for assurances around key issues such as control, governance, performance and milk pricing."
Other capital structure options examined and discarded included a part divestment of downstream businesses, use of two classes of shares and a call option that would have given the supplier co-operative the choice of purchasing New Zealand-based manufacturing and global distribution assets of the listed Fonterra at a later date.
Chief executive Andrew Ferrier said there was no crisis driving the need for change but it was good to be on the front foot.
The biggest growth opportunities facing Fonterra were in fresh milk and behind borders, Ferrier said.
"We're going to continue to grab opportunities now, at some point in time we'll need more capital but by then we'll have solved it because we were smart enough to think about it today."
The three big issues
* The need for clear rules about setting milk prices to resolve possible conflict between the needs of farmers and investors.
* How the new listing will affect the price that farmers will have to pay to take part in the co-operative.
* Farmers will have to decide if a global growth strategy is what they want and worth the change.
