19 Nov 2009

Strategy on Fonterra profit needed - Fed Farmers

3:11 pm on 19 November 2009

The next challenge for Fonterra will be developing a very clear strategy for how it will use money held back from its profits to grow the business, says Federated Farmers chairman Lachlan McKenzie.

The dairy co-operative has won approval for its $900 million restructuring plan, which allows farmer shareholders to hold up to 20% more shares than they need to match their milk supply.

Fonterra's policy has been to pay what it earns to farmers and it has kept back little of the payout over the years.

The company's chairman, Sir Henry van der Heyden, says Fonterra will outline its retention policy to farmers before asking them to buy extra shares.

Mr McKenzie says getting the strategy and retention policy worked out will be essential to getting farmer support for the third step in the capital restructuring process; allowing them to trade shares amongst themselves.

Mr McKenzie argues that Fonterra's business would be worth a lot more today if it had kept back more from its earnings in previous years to reinvest.

A vote on whether to allow farmers to trade shares among themselves will be held after further consultation next year.

Shareholders Council chairman Blue Read says that will be a bigger change and will take more time and effort to decide.

Restructuring 'a first step'

A former chief executive at Fonterra says in the long term the dairy cooperative will have to keep looking at new ways of raising capital, despite the impending injection of funds from farmers.

Craig Norgate, who was chief executive from 2001 to 2003, says farmers were in favour of the restructuring plan because they want to support the company themselves in the first instance and he believes the move to offer the extra shares will be successful.

He says the move is a first step, and the company could also look at a policy of retaining funds for reinvestment.

Mr Norgate says outside investment is the most expensive form of funding and it is better to exhaust a company's own resources before exploring other options.

Questions over share uptake

Agribusiness Professor Keith Woodford, from Lincoln University, says many farmers won't be able to find enough cash to buy more shares.

He says farmers are now having to pay the price for refusing to raise capital by listing the company.

Sir Henry says Fonterra will send out information about the shares to farmers in December or early in the New Year, and will allocate shares by 20 February.