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Fonterra - Source: ONE News -
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The surprise jump in whole milk powder prices on Fonterra's online auction this week could hardly have come at a better time for the co-operative.
The announcement for dairy farmers that prices had jumped 21 percent on Wednesday came just hours before they were about to briefed on the controversial third stage of the dairy giant's three stage capital restructuring plan .
The restructuring of Fonterra's capital arrangements has long been contentious for its farmers and while they are cautiously supportive of the current three step plan (the first two stages having already been approved) ... one suspects they will always be wary of any new proposals by the management.
So the jump in prices would have no doubt made the details of Wednesday's announcement a little easier to digest, especially the new part of the proposal to step up a shareholders fund that would allow a form of outside investment.
Under this planned unit trust type fund, farmer shareholders would be able to sell the right to the dividends on their shares and any fluctuations in share values, to the public.
However farmers would not give up control of the shares or lose voting rights.
In announcing this move, alongside the well canvassed plan to allow farmers to trade shares amongst themselves, Fonterra did run the risk of upsetting farmers& who sternly knocked back an attempt at outside investment a few years ago.
However I think generally speaking the management of Fonterra did a pretty good job this time of explaining the new fund and getting across to farmers that it will not amount to the loss of any control.
And so far, going by the response of Federated Farmers, farmers are ok with the plan...and more importantly, likely in that organisation's view, to back it when it gets to an official vote.
This is good news for the co-op's management as it desperately needs to remove the redemption risk that it currently faces each year of having to buy up farmer shares in full, when they want to leave the company.
A new trading exchange system, along with a new shareholders fund to help farmers when times are tough, should make the company far more financially stable and well positioned for future growth.
Of course many in the financial community don't think the proposal goes far enough and want to see part of Fonterra publicly listed on the stock exchange.
This is not only because there is a desire to have increased investor access to the agriculture sector on the share market& but because there is a genuine belief that Fonterra actually needs a lot more outside equity if it is to really grow and fulfil its potential in coming years.
Meanwhile the increased possibility of overseas interests with deep pockets coming in to the New Zealand dairy sector and luring away Fonterra farmers has also given the balance sheet issue a greater sense of urgency.
And that was evident when hearing Fonterra Chairman Sir Henry Van der Heyden talked about the stage three plans on Wednesday.
While he didn't specifically refer to the arrival of the Chinese-backed Natural Dairy Holdings Limited on the scene, he did acknowledge that more offshore players created an even greater redemption risk for Fonterra.
No doubt there will be more discussion on the plan to come, but so far management look like they may be on to a winner this time...
