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

Monday 30th April 2012

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Fonterra Cooperative Group will not go outside its farmer shareholder base to look for new capital to fund the cooperative'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, Fonterra chairman Sir Henry van der Heyden emphatically ruled out Fonterra seeking new capital for growth.

"No. We're a cooperative," he said in response to questions on whether the cooperative 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 cooperative 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, van der Heyden announced a second vote last week, saying vocal opposition from what he believed was a minority of shareholders was destabilising Fonterra's relationships with global trading and business partners.

That announcement had come as "a surprise," Simon Couper, the chair of the Fonterra Shareholders' Council 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.

Van der Heyden 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 cooperative.

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, van der Heyden was at pains to stress TAF was not a forerunner to other kinds of private capital-raising, and that Fonterra would remain 100 percent 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.

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

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 cooperative, 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.

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