Fonterra reaches a crossroad

When a farmer leaves Fonterra, they redeem their equity in the cooperative and that sum must follow within 30 working days of the season ending. This hole is why two years ago, some 90% of Fonterra's shareholder-suppliers voted to change the cooperative's capital structure.  While the proposed shareholders fund was light on detail at the time, it was proposed as a balance sheet 'shock absorber'. The idea is the fund will buy shares off farmers, with the dividend income enticing 'mum and dad' investors to buy 'units' in the fund. Fonterra gets a $500m buffer and unit holders get a safe investment.

Two years on and Federated Farmers Dairy council has asked Fonterra's board to consider a second vote. This request wasn't made lightly, but if, as we're told, there's overwhelming shareholder support for the proposal, a second vote will deliver a strong endorsement.

Two-years after the 2010 vote, farmers contacting me are uneasy that details about the fund remain sketchy. Comments from the Prime Minister on how he'd like to see our cooperative on the stock exchange doesn't help things.  This is our company and Fonterra's future must only be decided by those who own it.

As my extended family is in Holland, their experience is relevant; the old Friesland/Coberco in what is now RoyalFrieslandCampina started down a similar path but stopped. It stopped because ex-farming 'dry' shareholders started to dominate decision-making.

It seems the investment outlook of ex-farmers changes when they exchange the farm for a dividend.

As proposed, the unit holders in Fonterra's shareholder fund won't get a say in Fonterra in exchange for their cash. However, it's a brave person who'll place hand on heart and say the fund will only ever be 8% of Fonterra. For two seasons in the past decade, dairy farmers have done it tough financially.

Imagine during a tough season, like 2008-9 and with creditors knocking at their door, a 'white knight' fund offered to buy shares from farmers. It would be hard to resist. When times are tough, constitutional blockages can be overcome even if the fund's expansion came with strings attached. While Fonterra can promise safeguards to protect its 'wet' farmer-shareholders, time and economic circumstance could erode that. Then of course, someone may take a legal challenge throwing everything up in the air.

Some say the shareholders fund will help turn urban investors into farming cheerleaders. Pragmatists argue the number of individual investors in the fund will be tiny. Those investment types in print and on radio after all say the fund would be good news for KiwiSaver and the New Zealand Super Fund.

Compared to the number of corporate train wrecks littering New Zealand's history, Fonterra hasn't done too bad being owned by farmers. That's why we want the proposed shareholders fund put

to farmers.

Much in TAF makes sense, but the fund stands out like the proverbial on a bull. The current review of the Dairy Industry Restructuring Act actually hangs on Fonterra having a shareholders fund. The best course is to decouple the proposed fund from TAF and have an open discussion with farmer-shareholders. Relying on a 2010 vote for what was conceptual at best, belies the fact Fonterra is in good financial health. Time is on our side and we advise Fonterra's board to take it.

• Willy Leferink is Federated Farmers Dairy chairman.