Fonterra warns on impact of TAF 'no'

Rural News

A 'no' vote on Trading Among Farmers would see Fonterra 'lose window of opportunity to grow returns and lose control of own destiny,' CEO Theo Spierings says

19th Jun 12, 12:47pm by Gareth Vaughan

Fonterra will lose control of its own destiny if its farmers-shareholders don't back the dairy co-operative's Trading Among Farmers (TAF) scheme, and will have to come up with a Plan B to resolve redemption risk that could mean two years of talking to the Government about new legislation, Fonterra CEO Theo Spierings is warning.

Spierings' warning came as Fonterra also reminded farmers today there are only four days left to vote and said 35% of its shareholders have voted thus far, ahead of a special meeting of farmer-owners to vote on the TAF proposal this coming Monday, June 25.

TAF is a process to allow outside investors to own economic rights, including dividends, to Fonterra shares but not voting rights. Fonterra says the point of TAF is to remove redemption risk from the co-operative. Critics argue TAF would dilute farmer control of the co-operative whereas Fonterra says it's necessary to reduce the risk of farmers pulling their money out quickly.

Fonterra is being coy on just how much support it wants from its 10,500 farmer-shareholders to go ahead with TAF and create non-voting, tradeable units allowing arms-length investment in New Zealand's largest business by non-farmers for the first time. It says the TAF vote is an ordinary resolution requiring a "50% plus majority" to be passed, but the board won’t proceed unless it has a "much stronger" mandate than that.

However, a second resolution on constitutional changes for TAF requires 75% approval, because it would change the co-operative's constitution. See more from Fonterra on the voting here.

Spierings, a Dutchman who replaced Andrew Ferrier as Fonterra CEO last September, said "huge" time and effort had been made to ensure TAF strengthened Fonterra's capital structure and protected 100% farmer control and ownership.

“I know some people fear change but a ‘no’ vote on TAF doesn’t mean we just go back to the status quo - things will change,” Spierings said.

“We will need to go back to the drawing board to resolve redemption risk and we will also have to put on hold key projects to increase the volume and value of our dairy exports. We will have to come up with a Plan B to resolve redemption risk. That could mean up to two years of talking to the Government about new legislation," he added.

"Given we’ve already spent more than three years developing TAF, this would put us in a five year holding pattern."

Fonterra's "Strategy Refresh" gave it a clear path forward but couldn't be implemented without a stable capital base.

“We will have to pursue fewer projects as we will need to hold back more capital because of redemption risk," Spierings warned.

“Our competitors will take advantage of this and we will lose our window of opportunity to grow returns.”

Without TAF, he said the Government would make Fonterra return to a Fair Value Share instead of its current Restricted Market Value, meaning the share price would be closer to NZ$5.57 than the NZ$4.52 based on the latest independent valuation.

“This sort of higher value would mean it would cost farmers more to share up and our redemption risk will become much bigger,” said Spierings.

"For example this year, a lot of farmers will have to buy additional shares at NZ$4.52 because of production increases. If production fell over the next couple of seasons, and we don’t have Trading Among Farmers, farmers would end up selling those shares - at the unrestricted price. This is likely to be much higher than the price they bought them for."

If this happens Fonterra would need to find tens of millions of extra dollars to fund these redemptions.

“If TAF goes ahead, the Government’s concerns will be satisfied - they will leave us to get on with it. With TAF, we control our own destiny,” Spierings added.

Fonterra said about half of the 35% of farmer-shareholders to have voted ahead of Monday's meeting had done so online. Voting closes via the internet, post and fax at 10.30am on Saturday morning. Alternatively farmers can appoint a proxy to attend the meeting and vote on their behalf. They can also vote in person at the various special meeting locations.

Monday's meeting will be held at 10.30am at the Claudelands Event Centre in Hamilton, and be connected via audio visual link to seven other venues being Whangarei: Forum North, Rust Avenue, Whangarei; Rotorua: Novotel Hotel, 11 Tutanekai Street, Rotorua; Hawera: TSB Hub, Waihi Road, Hawera; Palmerston North: Awapuni Racecourse, Racecourse Rd, Palmerston North; Nelson: Petite Fleur at Seifried Estate, Corner State Hwy 60 and Redwood Road, Appleby, Richmond, Nelson; Ashburton: Ashburton Hotel, 11-35 Racecourse Road, Ashburton; and Invercargill: Ascot Park Hotel, Corner Tay Street and Racecourse Road, Invercargill.

Fonterra said the results will be announced as soon as the vote counting is complete and chairman Henry van der Heyden has declared the results on the day. The results will also be available on Fencepost at www.fonterra.com.

(Story updated to clarify the level of support needed from farmers for TAF to pass).

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35 Comments

by Casual Observer | 19th Jun 12, 1:13pm 1340068380

Fonterra does NOT require a 75% vote to go ahead with TAF. While the TAF resolution at the special shareholder meeting is an ordinary resolution that requires a 50% plus majority to be passed, Sir Henry says the Board won’t be proceeding unless it has a much stronger mandate than that. http://www.fonterra.com/wps/wcm/connect/fonterracom/fonterra.com/our+bu…

van der Heyden has repeatedly refused to state just what percentage the Board considers a strong mandate. The only indication given so far at meetings is that if the voting comes in, in the 50-59% range they won't go ahead with it. So 60% could see the Board going ahead with it.

Then comes the tricky bit - Resolution 2 which requires constitutional changes, requires 75% to pass. But if it doesn't pass muster, then the Shareholders Council support may be reviewed. If that is withdrawn then the Board can't go through with it as it requires 50% support from the Council.

I note that Councillors are now going to be holding meetings this week - sounds like a desperation measure as these hadn't been flagged before.

by Gareth Vaughan | 19th Jun 12, 1:48pm 1340070483

CO, I took the 75% figure from a BusinessDesk story we previously ran (follow the first link) and to the best of my knowledge Fonterra hasn't asked for it to be corrected.

I have, however, asked Fonterra for clarification.

by Casual Observer | 19th Jun 12, 2:08pm 1340071703

That's ok Gareth. Fonterra seems to be more than happy for there to be mass confusion. ;-) They seem to especially like it if shareholders believe the 75% story. One only has to read the Opinion piece van der Heyden did in the Straight Furrow where again he writes cleverly around the 75% required for the constitutional changes, all the time ignoring Resolution 1 by not mentioning it, nor the fact it only requires 50%.

by Gareth Vaughan | 20th Jun 12, 12:29pm 1340152140

In response to my questions Fonterra have sent me the following. They are being coy in my view:

The confusion is over two separate resolutions and whether they need a change to the Constitution.

- Farmer shareholders gave us resounding support two years ago to push on with TAF.

- Now the Board wants a clear mandate to proceed.

- Ordinary resolutions on TAF require a simple 50% majority. Only the proposed constitutional changes require a 75% vote.

- But the Board is of the view that it won’t proceed with TAF if the vote only meets that minimum 50% level of support. It would be too divisive for the Co-op.

Resolution 1 - Trading Among Farmers

Technically a vote of 50% is required because this won't require a change to the Constitution. However, as the Chairman has pointed out, TAF will not proceed unless they have a much stronger result.

Resolution 2 - Constitutional Changes for Trading Among Farmers

Requires 75% approval, since it requires a change in the Constitution

Fore more information see page 6 of the Notice of Special Meeting for Shareholders - at the bottom of the TAF voter packs sent to Farmers media release.

by Christov | 20th Jun 12, 12:48pm 1340153308

So Gareth effectively still no answer on what is the magic number....50.5% maybe..?

There's a bit of your cake and eat it too going on here with the big F......

Could you ask them a direct question to confirm what they percieve is a clear mandate number.........and does it require the support of Peter Dunne..(tee hee)

Because Gareth they are making it up as they go along ..! The largest dairy Exporter in the World is making it up as they go along........she'll be right.

by Gareth Vaughan | 20th Jun 12, 1:16pm 1340154965

Bernard is hoping to do an interview with Henry van der Heyden. Will remind him to ask about this.

by Christov | 20th Jun 12, 1:33pm 1340156001

Cheers Gareth....Tell Bernard this is a big deal....do the Simon Walker (without the unfortunate career move)...do not let him mincey pie around it....put on his best poker face and say ...Answer the Question Henry.....because if he cannot, then the decision is being made post ballot on what constitutes a mandate....now what kind of free (transparent )and fair resolution is that .

by iconoclast | 20th Jun 12, 1:55pm 1340157311

Yes: Gareth, Alex, Bernard: For those of you who were too young. Here is your training video of how to conduct an interview. The famous Simon Walker gender re-assignment or re-alignment http://www.nzonscreen.com/title/tonight---robert-muldoon-interview-1976

by Casual Observer | 20th Jun 12, 4:18pm 1340165908

I hope Bernard will also do an interview with someone, perhaps Lachlan McKenzie, from Our Co-op group to balance the spin we will hear from Henry. We need balance here Bernard, not a one sided pr spin. As one who voted for the CONCEPT of taf earlier, I have cast my vote for a definite no this time. I did however vote in support of resolution 4, which if successful will bind the Board to requiring 75% before they can proceed with taf. Why is media ignoring this resolution? Because the Board is recommending we vote against it?

by Gareth Vaughan | 20th Jun 12, 4:23pm 1340166230

CO, he has interviewed Lachlan McKenzie. Shouldn't be too far away.

by Casual Observer | 20th Jun 12, 7:03pm 1340175824

Great! Look forward to seeing the results of the interview with Lachlan.

by Seafarmer | 19th Jun 12, 1:26pm 1340069188

I've voted against TAF: the principle isn't right.

Sad that so much $$$ has been spent on the complicated detail.

Obviously there should be a way for suppliers to ease in and out of shareholding.. say over three years as suggested. The banks loan 100% on shares so who really owns them anyway!?

Why should government interfere with the setting of a 'restricted market' share value? Why should they interfere, full stop? I smell rats.

What is wrong with setting aside this year's flush of new share capital for contingent redemption risk?

I think the most passionate believers in Fonterra are the ones who will vote it down. I'm one of them anyway.

by Christov | 19th Jun 12, 1:58pm 1340071080

Put that press release in whatever format you want...it's a blatant threat...a bully tactic....the sniff of what you can expect in future, when compliance issues arise.

These are the tactics of the desperate.........maybe some freemarket heads riding on this...?

The agenda for N.Z. Inc. ....Corporatise it...list it ....dilute it.....shift the control.

Cass O. here's the link on the debatable percentage required.....http://business.scoop.co.nz/2012/06/01/fonterra-only-needs-bare-majority-to-pass-taf-oconnor/

by Casual Observer | 19th Jun 12, 2:15pm 1340072111

I heard we may see three directors resign if it doesn't go through - reason enough to vote it down perhaps ;-)

by speckles | 19th Jun 12, 2:12pm 1340071972

I have been interested in this debate even though I'm not directly involved. I've been told the Fonterra reps believe those at the Directors meeting largely got the message and will vote for it. Their main concern is the number of large holdings that were away on holiday etc. and not at the meetings...

by Casual Observer | 19th Jun 12, 2:24pm 1340072659

not at meetings - perhaps they were sick of the lack of consistentcy by the Board and had already made up their minds. I'm not saying it will not go through - the directors don't require a 75% majority - unless resolution 4 goes through. Interesting to read your comment though speckles. Thanks.

by iconoclast | 19th Jun 12, 2:39pm 1340073574

C'mon speckles. Join the debate. You're the corporate adviser here. How would you advise a client who is borrowing short to invest long. Cos that's what Fonterra's problem is. Similar to what brought the Finance Industry to it's knees. Agonising over the symptons and not the disease.

by Stephen Hulme | 19th Jun 12, 5:16pm 1340083003

How would you advise a client who is borrowing short to invest long.

The same way the Federal Reserve, RBNZ and any other central bank encourages, by it's rate setting actions (zero to negative real interest rate monetary policies), banks to borrow short and lend long - particularly to the government bond market, which retains a positive carry status due to the front end rate cuts.

This is State intervention of the type expected by Orwell - why would Fonterra's elitists not expect to be part of this scheme to also benefit from this type of pervasive wealth transfer scheme? GE & GM felt obliged to join up.

by Omnologo | 19th Jun 12, 3:38pm 1340077081

Fonterra will separately lobby any large scale shareholders that haven’t already been 'convinced'. TAF further hybridises Fonterra into a so called ‘new generation cooperative’. I don’t know much about ‘NGCs’. However Fonterra board and shareholders council (for what they are worth) cooperative expert, Professor Michael Cook University of Missouri, often makes reference to this type of cooperative as being superior to traditional cooperative models in the sense it allows members capital to be utilised more efficiently.

http://web.missouri.edu/~cookml/CV/RAE04.pdf

From what I understand, it also leads to eventual demutualisation as evidenced by many North American and even Australian cooperatives who have adopted this model.

http://www.ica.coop/coop/mutuality2.html

http://co-oppundit.org/files/demutualizationcooperatives21508.pdf

NGCs promote division within the shareholder base by refocusing the cooperative away from producer interest in preference for investor interest, as there is a sharper focus on dividend payments and share value as an excuse to efficiently allocate and mobilise cooperative capital.

I don’t understand why the Fonterra board seem determine to lead us down this path, evidence suggests that producer interests will be undermined, so I don’t know where that leaves the large scale shareholders (which includes much of the board)!

The threat of being exposed to an inflated Fair Value Share (incredibly misleading term) espoused by Theo is also misleading. The recent DIRA amendment has stated that it would be valued in the confines of it being a cooperative share, so this would likely prevent it being artificially inflated as has been the case in the past, or speculatively as will be the cased with TAF.

http://www.parliament.nz/NR/rdonlyres/5E94132F-292A-44BB-BC4F-C259E6CE6DAD/223264/DBSCH_SCR_5490_DairyIndustryRestructuringAmendment.pdf

If TAF is voted down, we certainly will have to go back to the drawing board, and three director resignations would be an encouraging start. It will be about reforming the cooperative to develop a structure which safeguards the inherent value of supplying shareholders milk whilst unlocking value creation potential of a complimentary growth strategy, cooperative capital (which has been contributed over many generations, not just by Henry, David Carter, MPI, and speculative investment types), and leverage attributes common with aligned agricultural cooperatives globally, as hypothesised by Dr Onno van Bekum, http://www.ourco-op.co.nz/

Heres what Dr van Bekkum thinks of TAF:

“Dr Onno Van Bekkum's report (see ourco-op website) makes the point that he has never seen a cooperative that asked its members to cash their shares. He says he fails to understand the boards line as if share trading is the panacea to all of Fonterra's problems and that the public must play a role in this. "I doubt whether trading contributes to cooperative solutions. Can't really think of any example that has truly worked to the satisfaction of farmers. I've just seen many cooperatives going down the drain when investor interests started prevailing over producer interests. Thats what TAF does: it deliberately creates a separate cluster of investor interests , both internal and external. You don't want that in a cooperative. You want to keep a clear focus on producer interests.”

by DF 72 | 19th Jun 12, 6:28pm 1340087330

i've also voted 'NO' , they will accept anything over 50% if it means ramming it through , also believe that the shareholder's council is now the board's puppet rather than the shareholder's voice / the shareholder's council voted 93% in favour and you would expect a similar outcome from farmers,if not Mmmm. TAF is the same as what was voted out last time round, it is again trading amongst non farmers listed on the NZX only wearing a fresh set of clothes that farmer's are just starting to see through . it does nothing for redemption risk, the only purpose i can see for it is to create a higher value share to satisfy the government . government wants Fonterra's share of milk supply to get below 80% and this is the vehicle to make that happen .

by NeilD | 20th Jun 12, 6:56pm 1340175391

An interesting wee article....

....A falloff in overall production won’t necessarily translate into continued high prices. Many growers remain concerned about troubles in the dairy industry, Cruickshank notes.

“Those guys are just bleeding right now,” he says. “Milk prices are low, and a lot of the bigger dairies are buying alfalfa month to month rather than for the whole year like they normally do. The banks are getting tough on them; they’re not extending credit.”

http://hayandforage.com/alfalfa/idaho-alfalfa-mixed-start

by Henry_Tull | 21st Jun 12, 1:17am 1340198267

"Current spot pricing would indicate a milk price around $5.25 per (kilogram of milk solids)."

"The result suggests dairy markets are finding a base, but further improvements and or lower New Zealand dollar is still required to deliver Fonterra's $5.50 (per kilogram of milk solids) price," ANZ New Zealand said .

http://www.stuff.co.nz/business/farming/7136919/Milk-prices-level-off-a…

We live in Hope, and not all just out side of Nelson...

How would TAF fix this.

How will TAF get back the ANZ earnings taken by the Oz supermarkets from fonterra.

by Henry_Tull | 21st Jun 12, 8:10am 1340223002

We are going back thru numbers over the weekend

Are you thinking of with or without irrigation (suggest location).

What price are you using for land

What herd size are you thinking of. and KG per head and per hec

Are you doing it for as a sharemilker or sharemilker landlord or a whole of business operation.

Are you buying grazing or priced in a run-off.

by Henry_Tull | 28th Jun 12, 7:48am 1340826505

I think you've answered your own question.

The way we look at things is to start from a long run payout ($5.5 to $6, as we have posted before), and work back from there, the costs for the next year are what they are re staff - paying a little more than you suggest which gives us a margin. We then look at what we do and see how we can alter what we do or or how do what we do for lower cost. We also look at cap spending as how does that reduce ongoing costs.

Its all about that margin, we have also been moving away from using averages in looking at production, and within this season, as the payout has been going down doing stuff that brings our marginal production - marginal cost of our last unit of production in trend with payout (last year the things we did were reversed).

We don't think the land is worth what crafar/fay/syndicators pay in a return on equity way. That is more the brakeup value (but attainable once every 4 years say, when banks are lending to anyone with a pulse). You will have seen the earlier posts on farm debt, with payout back to 10yr old price (eg cpi'ed) and operating costs up as you say, we don't see the banks giving an inch while their mega borrowers are there or there abouts paying interest (unlike the Rural Bank/State Advances as a lender) - so for those ppl, forget about return on equity calc's their "businesses" are making no $ for the owners.

And that the difference we have with you. We don't look at a yield % v commercial property, as the payout moves round so much. For example if you did want to use a % approach, and be sure of income the same way a building landlord looked at a 5 yr lease, then the "payout" would be close to <$5 to get the like for like yield/income risk, or the yield would be 10% to 14% (the same as a pub, or motels etc (given the income can go up or down). but comparing it to a bank deposit rate is NOT for us...

What we are thinking through now is by how much should we reduce our $5.5 to $6 payout figure with TAF coming down on us. For as we posted, we can not see how TAF is going to increase the farm income we get from Kg's MS (we are still wondering where the equity and equity returns are from all the new production share $ fonterra has been collecting over the last 5 years, are) but do see it going down.

http://www.interest.co.nz/rural-news/59762/farm-debt-growing-or-falling

And in a round about way there you have it. We think TAF will reduce the payout $ farm income/make it less certain compared to otherwise, and as such reduce the "value" (in any way you calc it) of the business we have.

by Omnologo | 28th Jun 12, 8:51am 1340830279

Thanks Henry_Tull for your insightful analysis, and mist42 for asking the question. I'll have to read it a few times to begin to understand it, but appreciate you willingness to share knowledge. Off to feed silage now though.

by Omnologo | 28th Jun 12, 5:59pm 1340863142

Is the market price what land is worth, or its productive value?

by Henry_Tull | 28th Jun 12, 9:42pm 1340876525

Its Ok, what I am not telling you are the production performance numbers we are working on. Our way keeps us looking at costs and what we do, all the time.

You are probably right. If you pay what Fay was looking to bid on a per cow/per head basis at the current milk payout things don't add up.

Also its not cost plus or price by cost stacker either.

Refer to an earlier thread with the valuer, you will see we go thru valuation approach, that sees a hypoth' buyer etc etc, we see that as always driving "values" up. But for larger Dfarms a problem is immediate past production is a better guide to future production rather than what a valuer would say for a particular property.

Also remember for mortgage valuation the bank instructs the valuer...

There are some large farms round us where production is below average, water tight, and we suspect mortgages values around where the loan amount is.... If they could do better than average production, the lvr would come back positive.

Flipside is some others are doing vwell...

Think of it this way. What would you pay for Dairy Holdings right now. First if you could buy all stock and go in as a going concern making the "investment % returns you need". Second what would you pay as landlord, with the existing executives being sharemilkers as they are..

Compare the two numbers to the public number disclosed as the bank lend.

by Henry_Tull | 21st Jun 12, 1:30am 1340199048

Mr Armer, one of 13 directors of Fonterra and widely tipped to be its next chairman, said the pollution that triggered the prosecution came from a split pipe and lasted only for about 24 hours.

He has been a Fonterra director since 2006 and chairs the supplier relations committee. He said the conviction against his company would probably have some effect on his role as a Fonterra director, and "I can't hide from that at all".

He and his wife, Dale, have extensive dairy farm interests throughout New Zealand and own 60 per cent of Dairy Holdings, which oversees 58 farms and 44,000 cows in the South Island.

http://www.stuff.co.nz/business/farming/7133725/Fonterra-director-takes…

Just think of the wealth of experience found through work at DHL. Lucky we don't get judged by the company we keep..

own 60 per... at the grace of the banking syndicate, thank god they don't mark to market, think of the productive valuations as most are landlords to sharemilkers (see milk price above). Some of the largest sharemilkers are exceutives of DHL.

Sir RN must be wondering, what just happened.....

Should fonterra request solvency certificates from all directors related activities...

We can just see investors rushing to flood TAF with $ with such at the helm.

by Casual Observer | 21st Jun 12, 1:06pm 1340240771

If the breach involves effluent actually reaching a waterway, they don't give you a warning. Not down our way anyway.

A failsafe device would have stopped effluent continuing to flow. However as an absentee farm owner I am well aware of the risk of prosecution should we have any sort of problem on the farm in regards to effluent. Regional Councils do not take an even handed approach to prosecutions so unless the whole story is known I wouldn't be too quick to judge. I'm not defending Armer.

by SimonP | 28th Jun 12, 8:41pm 1340872877

This is a sore point for me as I kitesurf and paddle-board the Maketu estuary where Armer's dairy farm is located. The smell of silage over the last couple of days has been really bad. There was noticable brown discolouration a few weeks ago. There have at times been dead cows floating in the estuary. I know EnvBoP monitor the water quality and I trust that they are doing a good job. However the surrounding area is essentially wetland and in my opinion dairy is a totally inappropriate landuse.

by Andrewj | 21st Jun 12, 4:25am 1340209506

His interests in Tasmania were never squeaky clean. The New Plymonth council must be wraped with their purchase

http://www.pet-abuse.com/cases/12069/TAS/AU/

by Henry_Tull | 21st Jun 12, 8:04am 1340222658

Shares in Danone tumbled 7%, wiping more than E2.5bn, well over $3bn, from its stockmarket value, after the dairy giant lowered its guidance on profitability, warning of a slump in demand in countries at the centre of Europe's debt crisis.

The French-based group, the world's biggest yoghurt maker, said that its operating margins, which it had predicted would prove "stable", would fall by 0.5 points this year.

http://www.agrimoney.com/news/danone-warning-wipes-$3bn-from-stockmarke…

with listed entities these things start to matter

Danone said that it was tackling headwinds - which also include higher-than-expected prices for and whey, whose price has been supported by popularity in high-protein drinks, and packaging – by cutting prices and boosting marketing drives.

However, the comments failed to prevent downbeat comments from analysts such as Andrew Wood at Sanford C Bernstein who said that "clearly, management credibility is likely to take as much, if not more, of a hit than its earnings per share following today's warning".

by Colin Riden | 21st Jun 12, 10:31am 1340231511

Who should we believe? Fonterra tells us that demand for dairy products remains strong and that the world just had an issue with some overproduction - and then only till the second half of this year.

It is well worth reading the original article:

http://www.agrimoney.com/news/danone-warning-wipes-$3bn-from-stockmarke…

by Colin Riden | 21st Jun 12, 10:35am 1340231739

'Credibility question'

http://www.agrimoney.com/news/danone-warning-wipes-$3bn-from-stockmarke…

by Gareth Vaughan | 22nd Jun 12, 1:32pm 1340328763

Bernard's interviews with Lachlan & Henry are now up here - http://www.interest.co.nz/rural-news/59917/lachlan-mckenzie-and-henry-v…