Fonterra opens organic milk supply to South Island dairy farmers
South Island dairy farmers will soon be able to supply organic milk to Fonterra.
The message for shareholders is clear: ignore the looming challenges facing the co-operative at your own peril.
Fonterra is at a crossroads. Milk supply in New Zealand is declining or will remain flat at best, thanks to environmental pressures, new regulations and alternative land uses.
At the same time, competition for New Zealand is showing no signs of slowing. Two more independent milk plants are going up in the Waikato, the heart of New Zealand dairy country.
Fonterra has signalled a change in strategy – moving out of overseas milk pools and focusing on adding value to NZ milk. But it needs to change the way it does business with farmer shareholders or face around 12-20% milk decline by 2030, based on its own modelling.
The capital structure isn’t the only thing that needs to change. The co-operative has to lift its performance and increase farmer returns, both through the milk price and dividends.
At the same time, the environmental credentials of both the co-operative and its farmers must continue to improve.
For the past few weeks Fonterra farmers have been mulling over the proposed flexible shareholding.
An important issue for shareholders is the future performance of Fonterra. Management have laid their strategy on the table for 2030: a 40-50% increase in operating profit from FY21 and, with the reduced interest from having less debt, this should translate into an approximately 75% increase in earnings, steadily increasing dividends to around 40-45c/share.
Management are also promising a group return on capital of 9-10%, up from 6.6% in 2021.
Through planned divestments and improved earnings, they expect a return of about $1 billion to shareholders by FY24, and around $2 billion of additional capital available for a mix of investment in further growth and return to shareholders.
Fonterra’s strategy and ability to achieve these targets depends on a sustainable supply of New Zealand milk and in turn a capital structure that enables this.
Fonterra must be an attractive option to farmers, who have a choice on where their milk goes.
That’s why the proposed capital structure gives all farmers a level of flexible shareholding, which is critical to supporting farmers to join or stay with the co-op.
Fonterra farmers need to give a strong mandate to its board and management by approving the new capital structure this week.
A strong vote will also make it easier for Fonterra’s board to get the Government onside and pass the necessary regulatory changes.
