CAPITAL STRUCTURE CONSULTATION 2021
HOW DOES OUR CURRENT STRUCTURE CONTRIBUTE TO US HAVING TO INVEST SO MUCH CAPITAL? The features of our current capital structure that influence the level of investment include: 1. The share price is partly set by reference to the value of units traded in a public market. Investors in public markets may value shares differently than farmers. On the whole, farmers are less diversified and have competing priorities for their capital – their investments are more focussed (i.e. in farming operations) and therefore it’s not possible to ‘diversify away the risk’ like an investor. Therefore, it is likely that farmers require a greater return from a share to make holding the share worthwhile. This means investors in the Fund may be more willing to pay a higher price for a unit than farmers would otherwise be willing to pay for a share. 2. The single class of Co-op share bundles together your right to supply the Co-op and the requirement to invest in its business, including value-added activities. This together with the current share standard means our farmer owners have little choice about the level of exposure they have to Fonterra’s value-added activities, and little flexibility around the level of investment required at various stages of their business life cycle. In addition to this, when our earnings increase, the share price should increase – so when our Co-op is doing well, our capital structure means it costs more for new suppliers to join and for existing suppliers to increase supply to our Co-op and the higher share price may also be a key factor for existing farmers to leave our Co-op. Overall, we believe that our capital structure is tilting the playing field against us when compared to other processors – the vast majority of which are corporates who don’t require any capital investment from farmers who supply them.
We found that our current capital structure could create challenges over time. Our current capital structure was put in place when New Zealand milk supply was growing rapidly. Today, we have to be prepared for a future of flat or potentially declining milk volumes. It is important to remember that under our current capital structure, when milk supply declines, the number of wet shares decreases and the number of dry shares increases by a corresponding amount. We have tested our current structure against potential declining milk supply scenarios based on variations of the average net loss of milk we’ve seen over the past five seasons and the expected losses from factors such as climate change, new regulations and alternative land uses after allowing for potential productivity gains.
In the chart below: » Scenario 1 represents environmental changes, land use changes, and changes in productivity, and assumes that our market share continues to change at half the rate of the past five seasons. This scenario could result in a decline in milksolids collected to around 1,300 million kgMS in the relevant period. » Scenario 2 represents the same environmental changes, land use changes, and changes in productivity, but assumes that market share continues to change at the same rate as it has over the past five seasons. This scenario could result in a decline in milksolids collected to around 1,200 million kgMS in the relevant period. » The scenarios start from the 2019/20 season’s actual milk collections of 1,517m kgMS. MILK SUPPLY SCENARIOS (KGMS MILLIONS)
1,000 1,200 1,400 1,600 1,800
0 200 400 600 800
Fonterra Milk Collections
Scenario 1
Scenario 2
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