Govt willing to change law for Fonterra

The Government says it is prepared to change the law to support Fonterra's continuing efforts to change its capital structure.

This capital restructuring process is an exciting opportunity for New Zealand farmers, and the country as a whole, Prime Minister John Key said today in his opening statement to Parliament.

Mr Key said Fonterra's capital re-structuring could allow the giant dairy cooperative to grow strongly into the future and deliver on its full potential, but might require changes to the company's enabling legislation, the Dairy Industry Restructuring Act 2001 (DIRA).

Fonterra, which controls more than 90 percent of the country's milkflow, is about to begin the most important step of its current moves for a capital restructure, to persuade farmers to trade shares among themselves, which will require changes to the DIRA.

Agriculture Minister David Carter is already considering proposals for expiry of provisions in the Act, and is accepting public submissions until Friday, but that work does not include issues relating to stage three of Fonterra's capital restructuring.

Fonterra late last year dropped the traditional "value add" label for the surplus earnings from fast-moving consumer goods and some speciality ingredients and listed them as a profit -- which it anticipates will be 35c - 45c in the current season, and told farmers it will in future hang onto 25 percent to 35 percent of its distributable profit.

Farmers expect a dividend payment of 20c to 30c per share in addition to their milk payment -- a total of about $6.05 per kilogram of milksolids, in the 2009-2010 season.

Until now farmers have had to hold enough shares to cover the volume of their milkflows, and when those milkflows drop because of drought, selling up to 20 percent of their production to another company, or quitting the cooperative, Fonterra has had to find the cash to pay out the unused shares.

This exposure to "redemption risk" has cost the cooperative $1.9 billion in the past two years, and today's comments by Mr Key can be seen as the start of a debate over Fonterra quitting that liability in the next few years, leaving farmers to cash in their shares by trading among themselves.

Directors have held the value of their shares at $4.52 each, despite a range of estimates which suggest a midpoint of value of only $3.83 in a market restricted only to Fonterra farmers.

There is a tacit expectation that eventually the shareholders will work out that they could considerably boost the value of their shares by opening them up to outside investment -- a concept that was resisted in 2007 when shareholders threw out a 2007 proposal for a partial listing.