Fonterra’s farmers have now received their voting papers and associated information about constitutional changes to allow share trading amongst farmer. There is plenty to read. There is a Capital Structure Booklet of 28 pages, and the Constitution Booklet of 85 pages. The vote takes place on 30 June.
I am confident that these proposals will be passed. I have a $10 bet with a Taieri dairy farmer that the ‘yes’ vote will be less than 90%, but I could be wrong. I am very confident it will be over the required minimum of 75%.
Farmers will vote for it for several reasons, despite very few of them having the fortitude to read the fine print. One reason is that there has been extensive consultation, and both the Board and the Shareholders Council are supporting them. Quite clearly, Fonterra has learned from the fiasco of the 2008 proposals.
A second reason is that farmers are in general comfortable that they will maintain control. If there are any doubts in famers minds it will be because the proposals are very complex.
I have previously expressed three reservations. The first is that Fonterra has oversold the extent to which the redemption risk will be overcome. I still consider this to be the case, but I note that the final proposal does leave it to the Board’s discretion as to how long it can take to bring the total number of investment (dry) shares back to the 25% limit. Having that discretion could prove fundamental to avoiding the need to redeem shares, although that could be at the cost of a decline in the share price.
My second reservation is that I would have liked more details of the milk price calculations to be ‘set in stone’. Instead, these rules are set out in the Milk Price Manual which can be changed by the Board. Part A of the Manual is public, but Part B is confidential. I remain uncomfortable that the Manual uses words such as ‘fair’, because what one person thinks is fair is not the same as what another thinks. And let’s be quite clear: in the new trading environment different farmers will be wanting different outcomes from the accounting decisions that influence what is called ‘milk price’ and what is called ‘distributable profit’. Fonterra’s perspective is that they have all of the necessary procedures in place to ensure fairness. Nevertheless, my hunch is that somewhere down the track there will be tensions, justified or otherwise, over the details of milk pricing.
My third reservation is that I think farmers perceive the trading market as a genuine non manipulated market. They are underestimating the impact that Fonterra’s ongoing decisions about selling more shares into the market, and perhaps redeeming shares, are going to have on the market price of those shares.
I have also commented previously that with a scheme as complex as this there are almost certainly going to be some unintended consequences. I think Fonterra also recognises this, and that is why the constitutional changes are framed so as to leave considerable discretion with directors as to the final implementation.
On the other side of the ledger, there is no doubt that the proposal, if accepted, will lead to a modest improvement of Fonterra’s balance sheet. It won’t provide the framework for the forty billion dollar company envisioned when Fonterra was formed. But it will help avoid a recurrence of the situation of late 2008 when Fonterra, with a very weak balance sheet, was really struggling to find the cash that it needed to pay its suppliers.
In many ways, passing the constitutional amendments will be just the first step in the share trading journey. Fonterra will never again be quite the same. It will have moved from a position where essentially all of its members had an alignment of interests, based on everyone supplying capital in proportion to production, and where it didn’t really matter what was called ‘milk price’ and what was called ‘profit’. In the new Fonterra, farmers will face a new set of investment decisions, and different farmers will head down different paths.