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Farmers will retain 100% control of Fonterra with the help of their equity under a new capital structure proposed by Fonterra.
Fonterra chairman Henry van der Heyden says the co-op's board has spent the best part of a year developing a new capital structure after its initial plan in 2007 failed to win farmer support.
In its current form, the co-operative is exposed to redemption risks whereby it must buy back shares from farmers exiting the co-op.
Van der Heyden says after milk production fell during the 2007/08 drought, Fonterra had to pay out $742 million of equity to farmers via redemptions.
"To be successful and achieve the best possible payout for farmers, Fonterra can't afford to have hundreds of millions of dollars washing in and out of the balance sheet every time milk production fluctuates, for whatever reason," he says.
With an expanded equity base it is hoped the co-op can undertake the investment needed for it to take the next step from a commodity exporter to a global foods group.
Under the latest proposal Fonterra has put forward three steps aimed at taking care of its capital needs for the next five years.
The proposed steps include strengthening its share structure, restricting share value, and letting farmers trade shares between themselves rather than solely through the co-operative.
A strengthened share structure flagged last week would see farmers eligible to hold shares of up to 120% of their milk production - 20% over and above the current limit.
While the co-op says it will not list publicly, it also says the value of shares will likely fall as they are adjusted to reflect the restriction of ownership to farmers.
Van der Heyden hopes the latest proposal will encourage farmers to maintain or bump up their stake in the co-op.
"Many of our shareholders have made it clear that they want to retain 100% farmer control and ownership of their co-operative. They have also indicated they are prepared to support Fonterra's ongoing growth by providing additional capital to fund profitable business opportunities," he says.
Farmers supportive
So far farmers like what they see.
"The ownership is totally 100% owned from farmers. That's what farmers have requested and Fonterra have listened to the farmers," says James Houghton a Fonterra dairy farmer.
However, there are fears farmers battling low dairy prices might not have deep enough pockets for the deal.
Business commentator Brian Gaynor believes the maximum they would be able to raise under step one is $400 million.
"They need a capital of injection of at least $1 billion. But hopefully over time I think that these proposals will allow it to raise more money and certainly make for a stronger balance sheet," says Gaynor.
Fonterra says farmers will be consulted on the first two steps over the coming weeks, and if there is general support, farmers will vote on November 18 at the co-op's annual meeting.
It needs 75% of farmer-shareholder support to put the proposal in action.
