Capital structure can be defined as the way a company manages the balance between its debt and equity to finance its activities, assets and growth.
Fonterra was formed in 2001 from the merger of New Zealand’s two largest dairy co-operatives and the New Zealand Dairy Board following a long history of consolidation among dairy co-operatives across the country.
At that time, Fonterra issued Co-operative Shares to farmers in proportion to their supply. Our Co-op was required to redeem shares of exiting farmers or those reducing supply. The value of the Co-operative Share was set annually by an independent valuer.
In 2012, Fonterra implemented the current Trading Among Farmers (TAF) structure, primarily to resolve redemption risk and provide a stable capital base. There are two key parts to TAF:
This is the farmer-only market where farmer shareholders trade Co-operative Shares between themselves. The introduction of the Fonterra Shareholders’ Market in 2012 meant that Fonterra no longer had to issue and redeem shares. Fonterra shareholders are currently required to hold a minimum of one share for every kilogram of milk solids (kgMS) supplied, based on their three-year rolling average supply. They may, but are not required to, hold additional shares, up to 200% of their milk production requirements.
The shares that are linked to milk production are known as “wet shares” while the shares that are held as an investment in excess of the wet share requirement are known as “dry shares”.
This is open to the public. Units are listed on the NZX Main Board and on the ASX, and they can be bought and sold in the same way as any other listed security.
Outside investors who are not farmer shareholders are able to invest in units in the Fund, which gives them access to the economic rights in a Co-operative Share (such as distributions and capital movements). Farmer shareholders can also trade in the Fund.
Although the Fonterra Shareholders’ Market and Fonterra Shareholders’ Fund are separate, they are designed to work together. Further information about shares and units is available here.
While TAF continues to function effectively today, it’s important to look at whether it best supports our Co-op’s purpose and refreshed strategy over the longer term.
Fonterra’s Board communicated its intention to review the Co-op’s capital structure following the strategy refresh in 2019.
The overarching goal of the ongoing capital structure review is to ensure Fonterra will be a strong and financially sustainable Co-op for generations to come.
From there, the following design principles were developed:
|Ownership and control||Does the structure preserve farmer ownership and control of the Co-operative for the long term?|
|Sustainable milk supply||Does the structure support our ability to attract and retain high quality, sustainable milk and provide financial flexibility for farmers?|
|Protect value||Does the structure protect value for current Co-operative members and allow farmers to transact their membership/shareholding in a way that is fair?|
|Align incentives||Does the structure align incentives between shareholders, unitholders and management to maximise value?|
|Build resilience||Does the structure manage redemption risk and economic shocks in a way that makes the Co-operative resilient?|
|Transition effectively||Is the transition to a potential new structure affordable, achievable and fair to unitholders and farmer shareholders?|
|Access capital||Does the structure preserve balance sheet strength and provide access to capital at a reasonable cost in the future?|
|Simple||Is this structure simple to understand and simple to operate for both farmers and the Co-operative?|
The following documents were prepared as part of the introduction of Trading Among Farmers in 2012. They describe the arrangements at the time they were issued and have not been updated since then.
Trading Among Farmers Blueprint
Prospectus and Investment Statement
2013 Supply Offer