Andrea Fox: Plan pivotal to Fonterra's future

The Fonterra capital restructure proposal will need 75 per cent farmer approval and Parliament's okay. Photo / Kenny Rodger

Fonterra dairy farmers may be sleeping easier knowing they have killed off any idea directors might have had about a market listing in the co-operative's upcoming capital restructure debate, but has the national interest been served well, if at all?

With external capital raising jettisoned for the foreseeable future, New Zealand's biggest company and a cornerstone of the economy is left to fulfil enormous earning expectations with equity mined from in-house resources - and who hasn't heard dairy farmers complain this year that it's a struggle to find the money to feed their cows, never mind afford the shares necessary to supply Fonterra this new season?

No one, least of all Fonterra leaders, suggests the big cheese of the economy (revenue last year $19.5 billion) open its vaults completely to Joe and Jane investor - as directors illustrated in a failed 2007 restructure attempt there are ways and means by which a partial listing could have been achieved while leaving farmers in control.

But an inconvenient truth remains, as farmers clutch their holy grail of 100 per cent ownership and control.

When Fonterra was created from a huge industry mega-merger eight years ago it was by the grace of bi-partisan supported legislation, promoted by industry hyperbole and forecasts of big economic gains for farmers and New Zealand Inc.

Promoters claimed the merger would put nearly $1 million a day extra in the pockets of the-then 14,000 farmers who would supply Fonterra - $310 million a year - through cost savings, revenue increase, and strategy gains. They told us the merger, which would create an entity controlling 96 per cent of New Zealand milk supply, was essential to end dysfunctional, competitive inter-industry behaviour by the Dairy Group, Kiwi Dairies and the single-desk exporter Dairy Board.

They said a merger would address global challenges such as consolidation of customers and competitors and the formidable growing market power of retailers and manufacturers. The alternative scenario, never seriously promoted, was for Kiwi and Dairy Group to keep competing. The Commerce Commission was effectively shut out of the dealmongering, farmers voted in the merger and the Dairy Industry Restructuring Act 2001 was passed to enable it.

Policymakers suggest the Fonterra proposition would not get to first base if it was raised in today's business and government environment.

But the fact remains that in 2001 there was a public understanding that Fonterra would become the Nokia of New Zealand. This has proved to be a fantasy, arguably because its farmers, whatever the global economic conditions, demand Fonterra pay them more than half its revenue every year while requiring it to improve its performance on little and sometimes zero cash retentions.

There is also a quaint notion in the shareholder base that profitably running Fonterra, a multi-national company, should be no more challenging that running a successful farm. Write up a business plan, carve down your costs, aim for maximum productivity and go for it. How hard can it be, they ask in letters to editors and submitted articles to rural publications?

Another debatable notion is that a farmer, just because he or she runs a multimillion-dollar farm business, should be sufficiently informed about the workings, needs and challenges of a global company's treasury to be able to confidently vote on them, as Fonterra shareholders will be asked to do in the coming capital structure debate.

Complicating all this is Fonterra's redeemable share structure which enables huge sums of money to wash in and out of the balance sheet when milk production falls and rises on the caprices of currency, weather, bank credit lines, or a non-share requiring processor setting up down the road.

While most New Zealanders will empathise with farmer angst about the suggestion of selling the family silver, the question will have to be asked, and answered, before Fonterra is much older: have farmers been good shepherds of the special treatment they received in 2001? Agriculture Ministry figures suggest not.

Apparently farmers have left an average $14 million a year in Fonterra, or 50c a cow. Even in its worst payout year the co-operative has never had operating revenue below $11 billion. Yet farmers have encouraged, or at least not resisted, Fonterra leaders' pursuit of a value-add business growth strategy, which involves a lot of intellectual property and is capital hungry. Fonterra's debt has soared in the past two years, it has a gearing problem, and still its shareholders bay for blood if payout disappoints.

This is crunch time for Fonterra. Its chairman Henry van der Heyden says the imminent capital structure debate is as pivotal to its future as the 2001 vote was to the industry.

Not only will the capital restructure proposal, without a market listing, need 75 per cent farmer approval, Parliament's okay will have to be sought because legislation will need to be changed.

The scrutiny could be testing given the National-led administration is highly energised about lifting New Zealand's productivity and thus its economic performance.