Declining milk supply would reduce the number of supply backed (or “wet”) shares. These shares would then become dry shares, and the economic rights to these dry shares could then be sold into the Fund. Our Constitution currently sets a threshold for dry shares of 15% of total shares (Aggregate Threshold). As at 31 March 2021, dry shares comprised 14.0% of total shares on issue. These milk supply scenarios suggest that the thresholds that were put in place when our current structure was implemented to help protect farmer
CUMULATIVE DRY SHARES IN EXCESS OF AGGREGATE THRESHOLD
250
200
150
100
50
0
ownership and control could be exceeded within a few seasons.
If our milk supply continues to decline to the extent suggested by the scenarios, this threshold is likely to be exceeded within the next few seasons and our Co-op would need to take action to stay within it – such as buying back shares or units. Buy-backs could impact our balance sheet and investment in other strategies that increase performance. Under these scenarios, buy-backs could potentially cost all shareholders between $500 million and $1.2 billion over the next ten seasons. An alternative to this would be to increase the thresholds and allow a greater degree of external investment in the Co-op’s performance through the Fund. However, our view is that the greater this external investment, the greater the risk to farmer ownership and control of the Co-op in the long term. We don’t think either of these outcomes are ideal, and we’ve reached the view that we need to have a conversation as a Co-op about the next steps for our capital structure. Any change takes time, and if we don’t start now, our options may become more limited, and the cost of addressing these challenges may increase.
Scenario 1
Scenario 2
We found there are strong potential options for change and we now want to hear your feedback on them. We looked at a wide range of alternatives to see which would be best at addressing the findings of the review and help ensure a financially sustainable Co-op over the long term. To give these discussions some structure, the Board has put forward a preferred
option – to adopt a Reduced Share Standard with either No Fund or a Capped Fund (see more in Section 3). This indicates our current thinking, but we remain open minded about adjusting that direction based on your feedback. The other options we considered, including staying with our current structure, are included in Section 5. Your feedback on any or all of these is welcome.
WE HAVE RESPECTED THE CO-OPERATIVE PRINCIPLES BELOW IN CONSIDERING OPTIONS FOR CHANGE: 1. Shares in Fonterra Co-operative Group can only be acquired by persons supplying milksolids to Fonterra. 2. Fonterra supplying shareholders agree to the dual commitment to supply milk and invest capital. 3. Supplying shareholders must comply with the Co-operative Share Standard in respect of their milksolids supplied. 4. Control of Fonterra is exercised by its supplying shareholders who have voting rights in proportion to their total milksolids supplied. 5. Financial benefits and obligations that arise from selling milk are allocated to supplying shareholders in proportion to their total milksolids supplied. 6. Financial benefits and obligations that arise from invested capital are allocated to shareholders in proportion to their shareholding.
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