Farmers back Fonterra change

Chief executive Andrew Ferrier (left) and chairman Henry van der Heyden at the Fonterra meeting in Christchurch yesterday that was beamed around the country. Picture / Stu Jackson

Fonterra farmers have overwhelmingly endorsed constitutional changes that will allow them to invest less capital in the company.

At a special meeting in Christchurch - video-linked to six other locations around the country - farmers passed two resolutions, both by more than 90 per cent.

The more significant change to the capital structure allows farmers to sell up to 15 per cent of their milk to Fonterra on a contract basis.

At present, they are required to invest in new shares as their milk supply grows. There are concerns that this creates a cost barrier for new farmers entering the co-operative and will, ultimately, limit milk supply growth.

"If we're not growing as a co-operative, and you don't feel the environment is right to grow milk supply, then we have a potential major problem," Fonterra chairman Henry van der Heyden said.

And in a manner that has become traditional, farmers told directors and senior management precisely what they thought of the changes.

Most complaints came from farmers who said the changes did not go far enough to address the capital cost of belonging to the co-operative.

Kaitaia farmer Danny Simms said the changes were a quick-fix solution that did not deal with the fundamental problem: the cost of shares.

"We have to fix the wound that will bleed this company to death. Don't just put a Band-Aid on it," he said.

Van der Heyden said the process of change had to be evolutionary, not revolutionary, while giving an assurance this would not be the last time the capital structure issue was addressed.

"There is nothing unusual about having the capital structure on the agenda every three to five years," he said.

It was important the proposals did not commit the co-operative to a path from which it might not be able to turn in the future.

Van der Heyden said that when the contract system was introduced, most farmers would continue to see the benefit of supplying all their milk as Fonterra shareholders.

There had been a huge shift in attitude in the past three years and, despite the concerns of a vocal minority, most farmers now saw the shares as an investment, not a cost.

While not quite a referendum on the issue, putting the contract milk scheme into practice would provide a good insight into the way most farmers felt about investing in shares.

"Let's be blunt about it, if there was a huge swing and everyone wanted to supply on contract we wouldn't have a sustainable co-op," van der Heyden said.

The contract system will be introduced gradually, with Fonterra aiming to buy about 3 per cent of its milk on contract in the 2006-07 season.

Chief executive Andrew Ferrier said continuing to increase milk supply was fundamental to Fonterra's success.

"Our focus must be directed at creating an environment for sustainable growth in milk supply," he said.

Fonterra has set a target of increasing milk supply by 3 per cent a year. It will not achieve that target this year - largely because of bad weather early in the season. Two other constitutional changes were also approved and Shareholders Council chairman John Monaghan said the 62 per cent voter turnout was a vote of confidence in Fonterra.

Structural shift

* Farmers are required to buy shares in Fonterra relative to the amount of milk they supply.

* There are concerns that an increasing share price will create a cost barrier to new farmers and an incentive for older farmers to sell out.

* Farmers will now be allowed to supply up to 15 per cent of their milk to Fonterra on a contract basis - without having to invest in additional shares.

* Although some believe this does not go far enough, more than 90 per cent agreed to the change.

* Fonterra has also replaced its peak notes system with a capacity charge and its supply redemption rights with excess shares.