The level of investment to be part of our Co-op is challenging for a number of farmers.
If we provide more flexibility, the Fund size could grow significantly. Our Co-op has constitutional thresholds designed to balance the interests of farmer owners and the interests of external investors in the Fund. Exceeding those thresholds could put farmer ownership and control at risk. We know that’s not something any of us want to see. If we provide more flexibility to reduce the level of investment for farmers to be part of our Co-op, without making any other changes to our current capital structure, our thresholds could be exceeded relatively quickly. That’s because farmers would be able to hold less shares and non-farmers would be able to invest more through the Fund. Therefore, providing more flexibility would need to be combined with making changes to the Fund in order to protect farmer ownership and control. The Fund size could also grow if milk supply declines. Under our current structure, when milk supply declines, the number of wet shares on issue decreases and the number of dry shares increases by a corresponding amount. Those dry shares can then be exchanged into units at any time, increasing the potential size of the Fund. If we make no changes to our capital structure and milk supply declines, we expect current thresholds relating to the Fund size to be exceeded within a few seasons.
We have choices to make around how we could address these challenges, and we want to talk with you first. To stay within the thresholds, our Co- op would need to take action such as buying back shares or units. This creates an uncertain demand on our capital, potentially impacting our ability to invest in strategy and growth. Under the scenarios that we’ve modelled, buy-backs could cost shareholders between $500 million and $1.2 billion over the next ten seasons. We’ve looked at a wide range of options. No structure is perfect, and all options have trade-offs. What we’re not willing to trade off is farmer ownership and control of our Co-op, which protects our interests as producers. Exactly how our capital structure evolves is a conversation for us as owners and is what we want to consult with you on now.
We all have a lot of capital invested in the Co-op. While it’s important for each of us to have skin in the game, we’re hearing there’s a desire for greater flexibility. This has come through in your feedback and we’ve heard it from farmers who have left in recent years. The investment that’s required to supply the Co-op is making it challenging for new farmers to join and can be a key factor for existing farmers in deciding to leave so they can pay down debt or invest their capital in other things. This can be a real challenge for succession, forcing difficult decisions when farm businesses transition from one generation to the next. At a share price of $5.00, a farmer supplying 150,000 kgMS would have $750,000 invested in our Co-op. Strong performance only increases this investment requirement. As our earnings increase, so too should the share price, which increases the capital investment to join, and the capital for those who leave. In short, we believe our capital structure is tilting the playing field against us when compared to other processors – the vast majority of which are corporates and don’t require any capital investment from farmers who supply them. What we’re hearing is that providing more flexibility would be valued by farmers and go a long way to supporting a sustainable milk supply.
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