KEY POINTS:
The idea of a tradeable Fonterra "value-add" share has been floated by the chief executive of the country's biggest corporate farmer.
Landcorp CEO Chris Kelly said such a scheme could involve splitting co-op shares in two to cover:
* The value-add part of the business, related to activities such as branded consumer products;
* Returns from more traditional commodity products.
The idea of a split-share system was first floated before Fonterra's formation but is said to have been dropped because it was seen as being too different from a traditional co-op.
Kelly's suggestion comes amid widespread farmer dissatisfaction with Fonterra's value-add performance.
Fonterra farmers hold shares, which have voting rights attached, in proportion to the amount of milk solids they supply.
This season Fonterra is aiming for value-add returns of 45c/kg of milksolids, which would represent a "dividend" return on farmers' capital of just 6.85 per cent of the current share price of $6.56.
A tradeable value-add share could let suppliers unlock cash if they thought better returns were available elsewhere. At the same time, they could stay in the co-op to get "core" commodity returns. The ability to cash-up value-add shares to invest elsewhere could also appeal to those seeing growth in land values slowing as their farms become fully developed.
Kelly stressed he was not pushing for value-add shares and was open to other ideas but said Fonterra's capital structure needed to change.
"[A split share] would make the value-added component more transparent, more liquid and it may give any farmers - but particularly the corporates - an opportunity to [free up] some of the capital."
Kelly said other corporates were concerned about the co-op's capital structure.
"I think there is a feeling articulated more frequently by bigger corporate farmers that the capital structure needs to be addressed."
Landcorp was considering various options for freeing up its capital in Fonterra, including Dairy Equity's swap scheme, which enables farmers to sell the beneficial rights to their shares.
"Whether we move now or later I guess will depend on a number of things [such as] how quickly Fonterra decides to change," Kelly said.
But Colin Glass, the general manager of Dairy Holdings - believed to be the biggest corporate dairy farmer - noted the relatively small uptake of Dairy Equity's swap offering.
Glass said Fonterra would need to consider how many farmers would actually want to cash-up any new value-add shares. He said Dairy Holdings had not dealt with Dairy Equity and suggested his company would not be keen on selling value-add shares.
"We believe that, as a dairy farmer, if we remove our investment on the value-add and focus on the straight commodity milk price of the business we do so at our peril."
Such a move would expose Dairy Holdings more to the ups and downs of the commodity market.
Glass said tradeable shares, and who might own them, could have serious implications for control of the industry. If shares were split and dairying fell on hard times "it could be quite easy for the industry to sell its soul or sell control of its value-add away from the current dairy farming base".
Fonterra Shareholders Council chairman John Monaghan said the co-op's capital structure was always under scrutiny. He believed control had to stay in farmers' hands if any change was made "because ultimately it is our farms that are on the line".
Fonterra chairman Henry van der Heyden said it was too soon to voice an opinion on the merits of a split-share system or any other capital structure ideas. There was no urgent need to change, he said.
If milk supply was not growing, concern about helping to retain or attract farmers' capital would be higher, but Fonterra saw supply continuing to grow in the short to medium term.
However, Fonterra's capital structure was being looked at and van der Heyden expected it to be different in five years' time. Fonterra would next month start talking to shareholders about their views, he said.
"Once we get agreement on the issues we take options out to them."
