Dairy industry strategy and structure as New Zealand takes on the world

Abstract

This paper is written at a time (February 2008) when the New Zealand dairy industry has been debating significant structural change. In part this is because in November 2007 the dominant Fonterra Co-operative announced proposals to change its capital structure to become a publicly listed company, albeit at least initially with majority ownership by a supplier co-operative. These Fonterra proposals were supposed to be voted on by farmers in May 2008. However, on 15 February 2008, Fonterra Chairman Henry van der Heyden wrote to farmer shareholders saying that the vote would now be deferred. It is clear that this deferral was in response to widespread feedback that the proposals would have been soundly rejected if put to the vote. The Fonterra Chairman also stated in his February 2008 letter that Board members ‘remain firm in our view that the [proposed] option is the best solution to address redemption risk, shareholder choice and capital for growth’. However, the reality is that these existing proposals are flawed. The reasons for this will be explored in this paper. Despite the flaws inherent in the existing proposals, the pressure for capital structuring will not go away. The reasons for this are that there are fundamental weaknesses in the existing structure relating to redemption risk, farmer choice, and capital for growth. Some of these risks relate not only to the structure itself but the way in which the fair value share concept is being managed. There are alternative structures that can deal with all of these challenges and also maintain farmer control over those parts of the business over which farmers need control. These too will be explored in this paper.