A death by a thousand cuts?

IS TRADING Among Farmers (TAF) the first step towards a public listing, and the demutualisation of Fonterra? This is the key question dairy farmers have been battling with, both at the time of the June 2010 vote and again now.

While practically every dairy farmer wants to retain the co-operative status of our company, we are aware that the economic world is rapidly changing and we believe our leaders when they tell us the business needs more capital to grow. So how do we take the steps towards trying something so far removed from a traditional co-operative, without risking it all?

For me, the argument that TAF is a step in the direction of public listing is very compelling. The previous Shareholders Council was very clever in building into the June 2010 vote a longer timeframe for the roll out of the changes. This has allowed dairy farmers to be sure that we really do need TAF for the long term. It has also allowed farmers to see how the investor community has been behaving in the lead-up to its introduction. 15 months on, I have serious doubts with what I am seeing.

My main concern stems from the fact that there has been very little communication between the Shareholders Council and members regarding TAF. We are being told there is very little happening, so nothing to communicate. I don’t dispute this. Perhaps the changes were so insignificant on a piece by piece basis that it would have looked silly discussing them all with members.

But when the Chairman, Simon Couper, finally did come out and update farmers, what we saw was that the small changes over the 15 month period actually amount to significant change around control of the shares within the proposed fund. Although Couper dismisses this as evolution, farmers need to see that this process, if applied to the whole concept, as exactly how our co-operative could “evolve” into an investor-owned business without us being aware of where it began to unravel.

So exactly how significant is this evolution of control of the shares within the fund? Any farmer who uses the fund through either design or need, will have already taken that first step towards letting go of the cooperative ethos. This group of farmers, who will receive the full benefits of being a cooperative member without the full financial commitment, will be able to vote to increase both the percentage of shares an individual farmer can put into the fund and the percentage of total Fonterra shares held by the fund. Given the relatively low percentage of shares that will initially go into the fund, it is highly likely that the fund in its current form may not fulfil the purpose for which it was set up for. Although it could be argued that this group, who will not receive a dividend payment, would work to protect the milk payment through their voting rights, they won’t protect the co-operative ethos and the non-financial benefits of being a co-operative. Now mix this with the far more sinister threat on the horizon – the Fonterra “guardian” controlled shares in the fund.

We were originally told that control of the shares within the fund would remain with the farmer. This small evolution has meant that control of these shares will be blocked together under a single body.

So now there would be a group of farmers, with full voting rights, that no longer links in practice why full shareholding should be the only way to access full cooperative member benefits. After all, the only penalty so far has been the loss of the dividend. This will not have been of major concern as this group primarily cares about the milk price, and this has been protected by the constitution through their voting rights – which they may, or may not, be using. It would not be too difficult to convince the majority of this group to give up these shares entirely, especially if the price was high enough.

This means there would be a nicely packaged chunk of Fonterra shares with their farmer owners wondering if they actually need them. Controlled by a single entity, this bloc of shares is highly marketable and very valuable.

When small details evolve, they mark the first steps to change. The real risk now is that the Shareholders Council fails to see the wood for the trees. Because it was voted on, the Council may now be convinced that TAF is the only capital structure option available, so they tweak it to fit until it’s no longer of value to anyone.

Fonterra was set up as a consolidated co-operative to provide the best returns to New Zealand dairy farmers. Reducing export competition, sharing resources and being the largest processor all help make this happen because co-operatives are always the price setters at the farm gate. This comes about because co-operatives return their profits, after retentions for growth, back to their member/suppliers. Without the profits being returned to suppliers, are we still a true co-operative or will we be seeing the death of our cooperative by a thousand cuts?