Fonterra chairman Peter McBride pushes the case with farmer-shareholders for why the co-operative wants to sell household name brands such as Anchor and Mainland

Fonterra chairman Peter McBride has strongly pushed the case with farmer shareholders for the co-operative to sell its global consumer business, including household-name brands such as Anchor and Mainland.

He told the annual meeting in New Plymouth on Thursday that as a farmer-owned co-operative and the associated cost of capital that comes with that model, Fonterra "is not the natural owner of a consumer business".

"Having reached that conclusion, our focus from here is on running a process that maximises value in a way that is in the best long-term interests of farmer shareholders," he said.

"The evolved Fonterra that remains will be a simplified business focused on our comparative advantages. It will be lower risk, be less capital intensive, and achieve an increased return on capital overall."

Fonterra first signalled in May this year that it was looking at selling the consumer businesses, including the Fonterra Oceania and Fonterra Sri Lanka businesses. And earlier this week it confirmed it was going ahead with plans for a sale, employing a dual track process that will examine the best potential return through either a trade sale or an initial public offering (IPO) followed by a stock market listing. "Meaningful buyer interest" has already been received.

Corporate advisers Northington Partners in an independent review of Fonterra's annual performance conducted for Fonterra shareholders and unit holders estimated that a successful sale of the consumer businesses could produce a cash payout of around $3 billion, or about $2 per share.

McBride told the farmer shareholders that when considering the co-op's strategy, "we need to challenge ourselves to look beyond the back fence, and past the here and now".

"The world is changing. We are moving out of an era of trade liberalisation and co-operation and into a world that is more expensive, competitive and volatile. Expectations are evolving and New Zealand milk is becoming scarce."

McBride said the cost of capital has increased, and many industries – "including agriculture and our bankers" – face higher capital requirements.

"In this new global context, Fonterra also faces increasing competition for both milk and capital here at home.

"We add value through the milk price - delivering a return on the $50 billion invested in on-farm capital. And by generating a return on the $12 billion worth of capital you have invested in the co-op.

"This last piece is central to the conversation on our strategy and the divestment of our consumer business.

"Right now, we estimate the weighted average cost of capital for a dairy farmer is somewhere around 10%.

"Consumer businesses are inherently more capital intensive and riskier businesses to operate - you’ve seen that play out over time in our own operation.

"Overlay that with the potentially higher geographic risk in the markets where our consumer businesses operate, and a respectable return on capital for the consumer business should be something north of 15%.

"Our Consumer business had one of its better years in 2024, but despite that, its return on capital was just 6.8%, up from 3.9% in 2023 and 0.2% in 2022.

"We cannot justify investing your money into a business that generates returns lower than your opportunity cost of capital, whilst at the same time exposing you to more risk.

"We are better off returning that capital to you, reinvesting it into the parts of our business where we have a comparative advantage, or a mixture of both," McBride said.

This is the dairy industry payout history.