KEY POINTS:
Henry van der Heyden is in for a big year.
The Fonterra chairman, who pockets $240,000 a year in fees for his role, heads a board that is juggling some weighty balls.
One of the biggest is the review of the capital structure, which may eventually lead to a full or partial public listing of the $13 billion co-operative, whose shares are now available only to its farmers.
While the NZX - of which van der Heyden is a director - may be salivating at the prospect, the man himself continues to play his cards close to his chest over what the in-house thinking is on the benefits of a listing or float.
"Everyone's running far too far ahead. Any change within a co-operative, you've got to take all the shareholders with you."
It is hoped completion of the capital structure review - and the presentation of options to farmers - will happen by year's end. Fonterra will need 75 per cent shareholder support for change, but given that it has been communicating that the next step would be "substantial", ideally it wants even stronger support, he says.
At present farmers must generally hold shares in proportion to the amount of milk they supply and cash up some or all of their shares when they cut back or stop supply.
Van der Heyden says Fonterra is now seeking agreement between the board, the shareholders council and farmers on what the issues are concerning the way this system is working. Then he expects there will need to be agreement on such things as what is non-negotiable before options for change are put to farmers.
On whether he thinks a co-operative is the best vehicle for the dairy industry going forward, van der Heyden chooses his words carefully, saying it's the best vehicle for dairy farmers.
"Ultimately they need control of their destiny. We produce milk. Within 24 hours that milk's worth nothing. So we have got to have as much control of the supply chain as possible."
Van der Heyden says the key issue driving the review is the two-to-five-year, medium-term "redemption risk" of too many farmers being tempted to cash in some or all of their shares as the price rises, particularly if a strong dollar keeps hurting overall payout.
The share price reflects earnings from value-added activities - such as sales of branded consumer products - and this year the value-add component of payout is on track to increase by 80 per cent to 45c/kg of milk solids.
If the company keeps performing at that level on the value-added earnings front, it could push the share price up further. "So it actually puts more risk around redemption risk."
Commentators have pointed out that a listing would mean that farmers selling shares would have to offload some or all on market, decreasing the demand on Fonterra for capital repayment.
Besides this redemption risk, other issues being looked at in the review are whether the present structure restricts Fonterra's access to capital for expansion and the range of investment choices farmers can make.
Van der Heyden says the NZX hasn't been giving him any feedback on the prospects of a listing. "My role there is as a governor of the business ... so, look, it doesn't even come into the thinking."
Of brokers keen to see a listing, he says: "They might be disappointed."
But professional advisers on options might be brought in further down the line "as long as we get further down the line".
Meanwhile, van der Heyden defended changes to the way Fonterra manages its foreign exchange risk.
His chief executive Andrew Ferrier was quoted this week as saying the co-op was not as hedged as it used to be, and it was suggested this might have hurt earnings because of the strong dollar.
The co-op had budgeted for a conversion rate of US61c this season and it said this week the full season average was now likely to be US67c.
Van der Heyden says that five years ago the co-op used to take rolling 15-month, fixed-rate forex contracts but had increasingly introduced more flexibility into its risk management strategies.
"So we take positions [based on] what we think is actually appropriate."
He says the greater proportion of earnings are still hedged and insisted Fonterra was not losing money this season as a result of the new flexibility.
"That's not the case at all. While Fonterra's been formed, our hedging policy has delivered more value thanif we converted our earnings at the spot rate and I'm certain that will be right for this financial year also."
Another key announcement this week has been moves towards "tactical pricing" in Canterbury and Waikato.
Under the scheme, due next season, farmers who have a genuine offer from a rival can approach Fonterra to negotiate over a new price for their milk that may be above the universal payout price that co-op members get. But the farmer will have to sell all co-op shares and supply under contract, so as to avoid shareholders receiving different prices, a move which would be against the co-op ethos. The scheme is a competitive response to the threat posed to supplies by other dairy companies.
Of the risk from rivals, van der Heyden says: "At the end of the day they've got fixed assets on the ground. They've got to make sure that milk goes through their assets, no different than the meat industry. So it's all about ... what price do they have to pay."
It is suggested tactical pricing could attract attention from the Commerce Commission if it is seen as Fonterra using its market size, and cross-subsidisation by other co-op farmers, to protect its supply base and prevent competition. Van der Heyden dismisses any suggestion of cross-subsidisation or paying so much for milk that it is unprofitable. "We will be pricing in the interest of Fonterra ... so there's economic benefit to Fonterra."
Tactical pricing has been seen as the possible thin end of the wedge in that it might herald the beginning of the end of the general "one payout price for all" policy.
Van der Heyden agrees there is concern over what it might mean for the co-op but he thinks there's strong farmer support for Fonterra doing whatever it can to protect supply.
"This is just the evolution of Fonterra, the evolution of the co-op, in a competitive environment."
A Fonterra statement this week stressed the co-op had no plans to introduce different payouts to farmers in different regions. But asked whether tactical pricing might be a forerunner to different prices for shareholders in different parts of the country, or for people supplying milk with different qualities, van der Heyden is less black-and-white.
"I'd rather put it this way - we will defend our milk supply in a competitive environment and we will use all the tools available to us. It's just too early to say what that means.
"So this is a first step that we're doing under contract and we're not prepared to go any further at this point in time. [We'll] see what sort of response we get and then we'll make the next decision."
On the aggregation of dairy farms and the increasing role of corporations in the industry, van der Heyden thinks the building up of larger family-owned units is positive for the co-op as it could further increase the "commercial focus" of members.
"The small farmers still play a very important role in the co-operative but the dynamics are actually changing."
Shareholders - big and small - will be hoping that the fast hands of van der Heyden and his fellow directors don't let any of those complex dynamics fall to the ground during this key year for Fonterra.
Heyden's big issues
* A possible listing of Fonterra shares.
* The "redemption risk" of farmers pulling capital out of the co-op.
* Managing forex exposure as a strong dollar hurts payout.
* The introduction of "tactical pricing" to help rivals stop pinching Fonterra suppliers.
Fonterra facts
* 2005-06 revenue: $13 billion.
* 2005-06 total assets employed: $13.08 billion.
* Staff 17,400 - 11,000 in New Zealand (2005-06 figure).
