OPINION: Fonterra’s 10,500 shareholder farmers will vote at a special meeting on June 25 whether to approve the Trading Among Farmers proposal, creating an avenue for non-farmer investors to access dividends paid on tradable, non-voting securities, listed on the NZX, linked to Fonterra’s performance.
Fonterra hates you to say this, but that means for the first time that non-farmers can «invest» in the cooperative.
Saying that out loud still gives some Fonterra farmers the heebie-jeebies. Writing it in a news story two years ago, when TAF was first unveiled, earned a call from the then chief executive arguing the toss about exactly what the verb «invest» means, so sensitive was the issue.
In the end, a vote in June 2010 confirmed TAF by an overwhelming 85 per cent of Fonterra farmers, so he needn’t have worried. The trouble was it then took nearly two years to sort out the fine print, which was plenty of time for some of those farmers -Â canny capitalists and sceptical by nature – to start getting cold feet.
Hence the decision by Fonterra’s retiring chairman of the last 10 years, Sir Henry van der Heyden, to take the highwire route of a second vote, later this month.
This time round, there is far more detail, and therefore perhaps more to go wrong. However, for those watching from the outside, it’s also much clearer just what it will be possible to «invest» in.
For a start, the Fonterra Shareholders Fund, as it will be known, will be around $500 million in size. That’s chunky in New Zealand terms and is the only way to get exposure to this country’s only true global multi-national company without actually owning a dairy farm.
In fact, it’s one of the few ways a non-farmer can easily get exposure to New Zealand’s agriculture sector at all.
The fund will be an entity separate from the Fonterra co-operative. Farmers will be able to exchange the «economic» rights not the voting rights in their Fonterra shares, for cash from the fund’s managers.
Those economic rights will then be turned into FSF units, and become tradable.
That answers farmers’ greatest fear the loss of 100 per cent ownership and control of the cooperative a bottom line from which Fonterra may never move in the future, even if it should.
However, farmers also fear that even without voting power, institutional investors will have influence, and could disadvantage farmers by forcing a trade-off between the Farmgate Milk Price the cooperative’s Holy Grail earnings measure and the FSF unit dividends.
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To stop this happening, there are two key promises. Firstly, the size of the fund is being kept at between seven and 12 per cent of shareholders’ funds, so it can’t get too big for its boots. And secondly, the process for setting the Farmgate Milk Price is being placed under strong regulatory oversight, is designed to be transparent, and just for good measure, two members of the 35-strong Fonterra Shareholders Council the farmers’ watchdog will sit on the committee that sets it.
Granted, the FSF could be allowed up to 20 per cent of shareholders’ funds, but that’s still smaller than the 25 per cent initially proposed. The provision is there to allow the co-op «room to breathe» if poor market or growing conditions see a surge in farmers needing to redeem capital in a hurry.
This redemption risk is the reason given for pursuing TAF, although Opposition critics such as Labour’s agriculture spokesman Damien O’Connor see it as a stalking horse for a bigger agenda softening farmers up for other new sources of capital in the longer run.
Sir Henry insists it’s not, but he’s been pushed to that position by events. At the very least, he wants his legacy to include a win on TAF.
As a result, this is the biggest single decision faced by these dairy farmers since Fonterra was created in a merger of dairy cooperatives just over a decade ago.
So, apart from getting law changes to allow it to occur, that just leaves one big wrinkle the votes themselves.
There are two resolutions, one requiring a simple 50 per cent majority, which simply approves the TAF scheme to go ahead.
The second involves six resolutions bundled into one, requiring 75 per cent support because they involve constitutional changes.
Any thought that this super-majority requirement makes TAF harder to win should think again. The proposed constitutional tweaks are all additional protections to keep farmers happy.
The power in the voting lies in the bare majority first resolution.
Sir Henry says if farmers only support TAF by a bare majority, the plan won’t go ahead, because it would «tear the co-op apart». The board is looking for a clear mandate.
But just where that balance lies is unclear. There is still a big judgment call to come.