Waiting for the problem to be at our feet will limit our options and likely increase the cost of addressing them, at the expense of future opportunities for us. PETER MCBRIDE – CHAIRMAN
Our Co-op’s financial performance will always be the main determinant of our share of that New Zealand milk. But we also know that our rigid compulsory capital structure makes it difficult for new farmers to join and is a key factor in farmers’ decisions to leave. A more flexible capital structure that caters for the diversity and different aspirations within our Co-op would be valued by farmers and support a sustainable future milk supply. Within that context, our review has found that our current capital structure could create challenges over time. 1. Under the current structure if milk volumes reduce, the number of dry shares will increase and could exceed the thresholds that were put in place to protect our farmer ownership and control. Our Co-op would need to take action to stay within these thresholds – such as buying back shares or units. Buy- backs could impact our Co-op’s balance sheet and investment in new opportunities that increase performance. Conceivably, buying back shares or units to ensure that we retain ownership and control of the Co-op could cost shareholders up to $1.2 billion over the next ten seasons. 2. An alternative to buy-backs would be to increase the thresholds for the Fund size, to allow a greater degree of external investment. We don’t think either of these are ideal outcomes, so we have been looking at other options for change. Exactly what that change could look like is what we want to consult with you on now. To give those conversations some structure, the Board has shared its current thinking. It is detailed in Section 3 of this booklet. We have arrived at this point after reviewing a wide range of capital structure options from co-operatives around the world – both within and outside the dairy sector – as well as options to evolve our current structure.
In Section 5 we detail the alternative structures that were considered and the reasons why they are not our current preferred option. We are keen to hear your views on these different variations as part of the consultation process. We will seek to cater for the diversity within the shareholder base, but we will all need to be pragmatic if we are to find a way forward together that is in the best long-term interests of our Co-op. Once we hear your views, and if the appetite for change remains, we will do further work to refine the preferred option(s) and have a second round of consultation. If we decide to seek a change to our capital structure, then you will have a chance to vote on that change. As some aspects of our current capital structure are reflected in the Dairy Industry Restructuring Act, a successful vote would likely be conditional on any necessary changes to legislation being passed. I appreciate there is a real sense of optimism in the Co-op with our improving financial performance and how we are travelling generally. But there is a sense of urgency with this review. Waiting for the problem to be at our feet will limit our options and likely increase the cost of addressing them, at the expense of future opportunities for us.
Throughout the process we have focussed on addressing three key issues: 1. Maintaining financial sustainability of our Co-op 2. Protection of farmer ownership and control 3. Flexibility for farmers’ invested capital that helps farmers to be part of our Co-op at every stage of the farming lifecycle and ensures we maintain a sustainable milk supply. Having narrowed down the options, we believe the best option for our Co-op is to move to a structure that reduces the share standard so you have greater flexibility, and either removes the Fund or caps the Fund from growing further to protect our farmer ownership and control. We’re referring to this as a “Reduced Share Standard” with either “No Fund” or a “Capped Fund”. Under this option, the Fund would either need to be bought back and removed from our capital structure (No Fund) or remain in the structure but with no ability to exchange shares into units so the Fund size would be capped (Capped Fund). A key outcome of this change is that shares would be bought and sold between farmers in a farmer-only market. I want to be clear with you that we expect this change to impact the price at which shares in our Co-op are traded, and that there may not be as much liquidity in the market. Ultimately, the price of our shares would be determined by the performance of our Co-op and trading between us farmers. Currently our share price moves in line with the price of units in the Fund. In that sense it is influenced by unit holders, who have a different investor profile to that of us farmers – a farmer’s cost of capital is typically higher. To cater for share flexibility, some farmers would inevitably have more shares than others. We believe this is a more sustainable proposition over the longer term than the alternatives we are confronted with.
Ngā mihi Peter
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