Fonterra — a non-farmer shareholders' conundrum
01 April, 2016
The share price of the Fonterra Shareholders' Fund today is languishing below the price it first listed at in November 2012, despite a strong New Zealand share market over this period.
We believe that part of this underperformance can be explained by the challenges the Fund has in balancing the interests of its key stakeholders — the farmer and non-farmer shareholders.
A good example of this was evident recently with the low milk price. A low milk price is bad news for the milk farmer but is good for the Fonterra Co-operative as it lowers its input price for value-added products. But instead of acknowledging that in some years the farmers will be happy and in others the non-farmer shareholders will enjoy the gains, the Co-Op tries to please everyone, tipping the scales in favour of the farmers — it is a farmer's co-operative after all.
We saw this in 2015 when interest-free loans were given to some farmers, on non-commercial terms and without consultation with other stakeholders.
There were rumours that such loans were going to be repeated when Fonterra announced its half year results, but given that Fonterra's debt levels are currently well above its target range, this was probably not feasible. Instead, Fonterra is looking to pay out 80% of its earnings by way of dividends, and accelerate the payment of these dividends to help farmers out.
Although all shareholders enjoy higher and earlier dividends, some shareholders would equally enjoy a reduction in debt levels and a prudent approach to capital management.
We all want to see a higher milk price so that farmers (and ultimately New Zealand) achieve a higher standard of living. However, all stakeholder interests need to be considered. This was one of the reasons we sold out of the Fund two years ago. We are disappointed that little has been done to improve alignment since then.