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Govt supports Fonterra capital rejig but imposes conditions

Andrea Fox, NZ Herald,
Publish Date
Wed, 27 Apr 2022, 10:35AM
Photo / NZ Herald
Photo / NZ Herald

Govt supports Fonterra capital rejig but imposes conditions

Andrea Fox, NZ Herald,
Publish Date
Wed, 27 Apr 2022, 10:35AM

The Government is to amend dairy industry legislation to accommodate Fonterra's capital restructure plan - but with significant provisos aimed at easing sector jitters about the potential for New Zealand's biggest business to throw its weight around.

The Government's proposals for amending the Dairy Industry Restructuring Act (Dira) will be open for stakeholder comment from now through May and subject to select committee scrutiny, said Agriculture Minister Damien O'Connor.

The proposed Dira amendments focus on enabling Fonterra to partially delink its stock exchange-listed unit fund on a permanent basis, improving the transparency and robustness of the governance and operation of the current base milk price-setting regime, and setting requirements for a "market maker" in the restricted Fonterra farmer-only share trading market, to support liquidity and transparency.

Proposed changes include increasing the number of ministerial nominees to Fonterra's Milk Price Panel from one to two, and requiring the Minister of Agriculture's approval of the chair of the panel.

The proposal to introduce a market maker to support liquidity in the farmer-only share trading market means Fonterra would have to contract a financial institution for this job.

The Government also proposes that Fonterra be required to make independent market analysis of the share price performance available to its farmer-owners.

Fonterra's 10,000-or so farmer-shareholders voted 85 per cent in support of a capital restructure proposal late last year, but the Government's tick was required because Fonterra is regulated under Dira.

In a response statement, Fonterra, the world's biggest dairy exporter, said the Government's aspirations for the $19 billion dairy export industry were well aligned to the cooperative's.

"We all want a high performing dairy industry, and a successful and innovative Fonterra is central to that.

"A strong Fonterra can lead the industry, building New Zealand provenance, lifting the bar on environmental performance and ensuring sustainable returns for all New Zealand dairy farmers.

"A flexible shareholding model will help our co-op maintain a sustainable milk supply. A globally competitive co-op of scale is in everyone's best interests.

"Fonterra's scale efficiencies improve our ability to invest in on-farm support services, innovation, new market and product development - all of which creates value for New Zealand in terms of milk price and profits returned to rural communities, export performance, employment, environmental performance, and community development."

Fonterra said the Government had signaled regulatory changes would not be in place by June 1, the start of the new dairy season.

The cooperative was preparing to implement the flexible shareholding structure as soon as possible, it told shareholders today in an email.

"Share compliance obligations will remain on hold until at least six months after the effective date for the new structure."

Fonterra said it would be participating in the consultation process, together with the farmer-elected cooperative council.

Fonterra was created under the enabling Dira legislation from an industry mega-merger in 2001 on the promise it would be "a national champion".

O'Connor said because of its size and influence in the dairy sector, the Government needed to take into account any potential risks to the long-term performance, innovation, sustainability and value creation in the wider industry.

That was why it was taking the opportunity to improve the transparency and independence of the raw milk price setting process, while also requiring Fonterra to produce a dividends and retention policy.

Fonterra collects around 80 per cent of the country's raw milk. In 2001 it picked up 96 per cent.

The Government wanted feedback on the proposed amendments and had released a discussion paper as part of its consultation on the changes, O'Connor said.

A Castalia consultancy report on the proposed capital restructure, commissioned by Fonterra's nearest export competition Open Country Dairy, sharply criticised the plan.

It concluded the rejig would cause its farmers a short-term loss of $4 billion, strengthen Fonterra's market dominance and push up the price of milk at the grocery chiller.

It would also probably fuel land prices, said Castalia.

With New Zealand milk production flatlining and expected to fall, Fonterra's capital restructure aims to ensure its tanks remain full by making it easier and cheaper for farmers to buy shares in order to be able to supply milk.

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