I’m looking forward to the next capital structure plan from Fonterra, due to be launched on Friday 18th September. The co-op has probably redeemed itself in the eyes of many farmer/shareholders by ruling out a sharemarket float which derailed the first attempt at reform. But I doubt they recognised any connection with the late great Bob Marley when they did so.
And to be fair the link is a bit tenuous, but bear with me.
There are two arguments for wanting to get more capital into the co-op: to manage “redemption risk”; and to fund growth.
Redemption risk is the risk that farmers will give up on Fonterra for some reason and cash in their shares. In that case, the co-op stands ready to buy them out. While there are some cyclical ups and downs, the main risk is of a “run on the bank”, where selling up could look rational simply to avoid being one of those left behind paying all the redemption bills. The only real way of managing that risk is by performing well as a business, so farmers will want to stay. If a decent fraction of them become disillusioned and quit, those that remain will be much worse off. This is true irrespective of whether the co-op does has cash lying around to make the payouts, or needs to borrow it. So at this point I’m pretty sceptical of redemption risk as an argument for more capital.
Funding for growth makes sense though. Growth could involve commodity processing in foreign countries or advanced product development of the sort that has made Tatua rich. Either way there is risky investment capital required. We all have different appetites for risk and my guess (based on casual observation) is that many dairy farmers are fairly risk averse. So an obvious solution is for the co-op to form joint ventures with other investors to pursue growth, along the lines suggested by Harry Bayliss and Michael Joyce last time around.
The co-op would take a cornerstone stake in each JV, and would recruit entrepreneurial capital from others. Ideally individual farmers could also subscribe for a slice of the action on specific projects.
There will be more to say on these subjects after the announcements, but in the meantime, the change of thinking apparent in the decision not to float, and all this redemption risk chatter, got me thinking of these lines from Bob Marley’s classic Redemption Song:
Emancipate yourselves from mental slavery
None but ourselves can free our minds
We can but hope for more of that!