Restructure of Fonterra legislation 'essential' to NZ Inc

The Dairy Industry Restructuring Amendment Bill is crucial to Fonterra and New Zealand Inc, the Primary Production Select Committee heard today.

The Fonterra Shareholders’ Council and Fonterra Co-operative Group says the establishment of the contentious Trading Among Farmers (TAF) scheme would provide a permanent capital base to implement the scheme which would protect the co-operative from future shocks, such as major drought.

“Fonterra is again at a crossroads as to where the company is going," Fonterra chief executive officer Theo Spierings told the commmittee.

"A lot of strength has been created in the past 10 years. We are very well placed for the future but we cannot take things for granted.” 

Mr Spierings, who referred to Fonterra as the “envy of the dairy world”, says milk production has grown by 40% to 50% since its establishment in 2001.

He labelled this growth as “unprecedented”, leading to the company becoming a key player in more than 100 countries.

“We welcome the legislation because we believe it will enable us to go forward.

"There are key opportunities for us globally, milk demand is set to reach 100 billion litres over the next 8 years and we have to stay relevant,” Mr Spierings said.

The bill, which had its first reading earlier this month, is calling for greater transparency in Fonterra’s milk price setting process and methodology.

Fonterra chairman Sir Henry van der Heyden told the committee the bill’s milk price oversight provision is something the company already partly operates.

“We don’t think this regime is necessary, but we can live with it,” he said.

However, there has been opposition by Labour MPs about the bill's proposed capital restructuring in the new share trading scheme, TAF, which took centre stage during today’s first submissions in select committee.

While the co-operative supports the bill, it has identified some sectors which would need to be amended to ensure TAF can operate effectively.

When finalised it is hoped TAF will create non-voting tradable units, deriving dividends from the value-added part of the Fonterra business.

This will create an opportunity for farmers wanting to free up equity and allow private investors partial exposure to Fonterra's profit.

The committee was told that while protecting the company from unforeseen shocks, it would also maintain and enhance open entry and exit, a “cornerstone” of the Dairy Restructuring Act since it became law in 2001.

Sir Henry says the legislation needs to be finalised so Fonterra knows exactly what it is dealing with before a special meeting with shareholders in June.

“At this meeting we will outline the details of how TAF will operate and will hold a final vote,” he says.

He is also asking that Section 109 (k), which outlines how the new co-op engages in trading co-operative shares, among others, be removed as this could cause “restrictions and roadblocks” in areas TAF needs to work to be successful.

Fonterra says that in addition to these proposals lacking clarity, it could result in the Fonterra Shareholders Market and the Fonterra Shareholders fund not operating as they need to.

Sir Henry also contends the provisions in this clause are “unnecessary” as once TAF is implemented, Fonterra will be subject to the laws with which listed companies must comply.

Fonterra Shareholders Council chairman Simon Cooper told Labour primary industries spokesman Damien O'Connor that 80% of shareholders voted in favour of TAF, and had been in support of this in principle since 2010.

“Until that mandate changes we have an obligation to follow through with that, as long as when we receive preconditions and see ownership and control is maintained,” she said.

He added that preconditions need to not only enable TAF but protect the co-operative.

Mr O’Connor said he shares the concerns of farmers about share trading provisions in the bill, and that these concerns will be discussed as submissions continue.

Labour is worried that allowing the trading of shares opened opportunities for offshore investors.

“We will be seeking assurances that the farmers who will have the shares and be able to have the shares will be New Zealanders, be New Zealand residents and, in fact, be the very people who should be controlling and owning our most successful company,” he told the House during the bill’s first reading at the beginning of April.

Submissions continue.