Fonterra won't seek new non-farmer equity for growth - chairman

BUSINESSDESK: Fonterra will not go outside its farmer shareholder base to look for new capital to fund the co-operative's growth, and will depend only on retained earnings and new entrants to the dairy industry to pay its portion of future ventures.

Speaking to reporters after a two-hour select committee hearing at Parliament, chairman Sir Henry van der Heyden emphatically ruled out Fonterra seeking new capital for growth.

"No. We're a co-operative," he said in response to questions on whether the dairy giant would pursue growth opportunities in the future.

Chief executive Theo Spierings said there were numerous other ways to structure new investments if they exceeded Fonterra's retained earnings and the proceeds of shares issued to farmers either entering or increasing their involvement in the co-operative were insufficient to fund such opportunities.

Options included joint ventures, raising debt and issuing corporate bonds, as Fonterra already does.

The issue is contentious for Fonterra's dairy farmer owners, who will be asked at a special meeting on June 25 to vote again on whether to implement the Trading Among Farmers scheme, which creates a tradable quasi-share, with rights to dividends but no voting rights.

While the TAF scheme was approved in principle at a vote in June 2010, Sir Henry announced a second vote last week.

He said vocal opposition from what he believed was a minority of shareholders was destabilising Fonterra's relationships with global trading and business partners.

Announcement a surprise

That announcement had come as "a surprise", Fonterra Shareholders' Council chairman Simon Couper said after today's hearings.

At this stage, the council has only endorsed the "process" for TAF.

It would not give its position until after receiving all information from Fonterra. It had received due diligence reports on the TAF proposals only late last week.

With clear tensions between the Fonterra board and the shareholders' council over the council's unwillingness to endorse TAF wholeheartedly, the two groups appeared jointly for today's submissions on changes to the Dairy Industry Restructuring Act.

Sir Henry told the committee TAF will allow Fonterra to stabilise its balance sheet with "permanent capital" by allowing farmers to sell the non-voting units to other farmers or to private investors instead of seeking capital redemptions from the co-operative.

That will eliminate a longstanding problem for Fonterra, which has had to dip into capital reserves to pay redemptions, especially in years where trading conditions are difficult.

However, he was at pains to stress TAF was not a forerunner to other kinds of private capital-raising, and that Fonterra would remain 100% farmer-owned and controlled.

That proposition was challenged by Labour MP and agriculture spokesman Damien O'Connor, who suggested private investors would seek to see the milk price paid to farmers cut to allow higher dividends to be paid on the tradable TAF units.

Too little information

Federated Farmers chief executive Conor English told the committee that many farmers wanted to support TAF, but were receiving too little information from Fonterra.

Concerns were filling the ensuing vacuum.

"Lots of the concern coming from farmers is from what they don't know. They're concerned this legislation will give Fonterra a blank cheque," he said.

"Fonterra haven't said how big the [TAF] fund will be or how they will raise capital.

"Farmers are shareholders and need to be treated and given the respect of shareholders," Mr English said.

"I'm not sure that Fonterra has met that test on this occasion."

Inflated prices

Meanwhile, competitors charged that Fonterra was calculating inflated milk prices not only to ensure its farmer shareholders got the best possible farm gate price, but also to stifle competition, reduce the overall capital value of the co-operative, and reduce dividend payments accordingly.

A joint submission from independent dairy firms Synlait, Miraka, and Open Country feared the proposed legislative changes would lock in arrangements that allowed milk price calculations based on a mythical "super-competitor", which bore no relation to the reality of most New Zealand dairy farms.

Fonterra is setting its farmgate milk price 40-50 cents a kilogram more than its own commodity business could pay and still make an acceptable return, they said.

The Independent Dairy Processors Group cited analysis by Deloitte that suggests Fonterra "funds an artificially high farmgate milk price via a cross-subsidisation of approximately $600 million per annum from its distributable profits".

The Deloitte estimate exceeds analysis by the Ministry of Agriculture and Forestry showing overpricing by Fonterra "was 30 cents kg MS in each of the past two years", IDPG said, citing a cabinet paper obtained under the Official Information Act.

By paying too much for farmgate milk, Fonterra's profits were "substantially lower than that of a group of international peers" and its share price was "artificially" lower, the group said.

IDPG represents the three independent dairy companies.

It argues that Fonterra changed the way it set the farm gate milk price in 2006 to reflect what a "notional or imaginary super-competitor could pay", creating a distorted price.

Before 2006 it set the price based on what an actual Fonterra commodity business could pay for raw milk while achieving a sensible return on capital, it said.

Deloitte's analysis shows the non-existent super-competitor "cherry picks" the best of Fonterra's scale and low cost of capital and independent processors' modern plant and "optimum product mix".

"Rather than resolving this problem, the amendment bill has the effect of parliament sanctioning the super-competitor and permanently locking in an artificially high farmgate milk price," the submission says.

"It's just common sense that Fonterra should be paying for milk based on the earnings of that milk," Synlait's John Penno, a spokesman for IDPG, said in the statement.

"Allowing them to make internal transfers from returns on capital to subsidise milk prices makes no sense for anyone."