EQUITY PARTNERSHIP TRUST Scoping Document for Consultation November 2014 MANAGE YOUR CAPITAL
IMPORTANT INFORMATION This material has been prepared as a first step in a consultation process with our farmers and to gauge preliminary interest from potential investors in an Equity Partnership Trust. Fonterra will not decide whether to facilitate the formation of a Trust until the end of the consultative process. If the Trust cannot be established on terms that work for a broad crosssection of our farmers, then Fonterra will not proceed. We can only establish whether this is the case by a very open consultative process with our suppliers and with potential investors. CONTENTS Executive summary 2 What is proposed and why? 4 How would the Trust invest in farms? 6 How would the Trust be governed? 11 Overseas Investment rules 13 How can I have input during the consultation process? 14 Frequently asked questions 16
The Trust would be a long-term partner for young farmers aiming for farm ownership, farmers planning succession and larger established operators.
EXECUTIVE SUMMARY Fonterra is consulting on the merits of establishing an Equity Partnership Trust (the Trust) that would provide a new opportunity for Fonterra farmers in New Zealand and Australia to access equity investment in their farming operations. Fonterra s desire is to provide greater financial flexibility for its suppliers and support sustainable milk production volumes through the ability to efficiently fund dairy farming in New Zealand and Australia. The Trust is intended to complement, rather than replace other forms of debt and equity funding. It is envisaged the Trust would be: a vehicle that allows targeted investment in well-operated farms in New Zealand and Australia; a collaborative partner that supports New Zealand and Australian farmers in financing their dairy production in a financially and environmentally sustainable way; and a pathway by which investors can gain exposure to an attractive and dynamic dairy sector, with the benefits of diversification across New Zealand and Australia, and across a variety of farming systems. The Trust would be a long-term partner for young farmers aiming for farm ownership, farmers planning succession and larger established operators, enabling them to access equity tailored to individual needs and growth ambitions, while reducing reliance on core bank debt to better manage earnings volatility. Investors would benefit by accessing a unique opportunity to invest in Fonterra-supplying farms in New Zealand and Australia, which supply high-quality dairy products with strong long-term projected demand, particularly in China and emerging economies. To leave farmers in control of their farm operations while providing investors in the Trust exposure to long-term returns from dairy farming, it is envisaged that: the Trust and the farmer would jointly invest equity in land and fixtures of the farm through a Farm-owning entity; the farmer would separately own the herd, farm machinery, Fonterra shares and other operating assets through a Farm-operating entity; and the Farm-operating entity would derive revenue and incur farm working expenses, and would make regular payments to the Farm-owning entity linked to farming profitability. These payments would, in turn, be paid as a distribution to the farmer and the Trust in accordance with their share of equity of the Farm-owning entity (please see page 6 for a diagram). Because farmers would retain a majority interest in and control of their operations, they would be highly incentivised to achieve productivity, earnings and growth goals to the benefit of both farmers and investors in the Trust. The Trust would only invest in land and fixtures. However, capital made available as a result of the Trust s investment could be applied by the farmer to purchase livestock, repay debt, invest in Fonterra shares or to reinvest elsewhere, provided that the resulting combined debt of the Farm-owning entity and the Farm-operating entity was within the Trust s investment parameters. The approach described would apply to individual farm entities, which offers additional flexibility. For example, a farmer in a position to borrow against the value of equity in a home farm could apply the capital made available to invest in a separate farming operation with the Trust. Such an approach would involve some initial set up costs, but offers several benefits, including: the farmer would be able to independently manage a financially separate farming operation; the role of the Trust would include prudent oversight of farming operations, primarily through standard reports provided to the Trust Manager by the farmer. It is expected that the farmer would also find these reports insightful in monitoring the performance of their business; the nature of the investment for Trust investors would be a well-defined asset class (pastoral dairy land), with oversight and governance that is less complex than investing in the full farming enterprise. 2
The Trust and the farmer, as owners of the Farm-owning entity, would share in the annual earnings of the Farm-operating entity primarily via a payment that varies with profitability. This would either be: by linking the payment to the Farmgate Milk Price; or by a payment related to the operating earnings (adjusted for tax) of the Farm-operating entity, after allowing for all costs and reasonable allowances, such as return on investment on operating assets (livestock and machinery etc.) and management fees. Under both these alternatives, the basis for setting the payment would be agreed between the farmer and the Trust before the investment is made, reflecting the specific circumstances of the farming operation. The second alternative would demand more extensive reporting and is likely to be better suited to larger farming operations. The options offered for sharing operating earnings may change over time for new investments by the Trust as the industry evolves. The investors in the Trust would typically seek investments of long duration (15-20 years+). However, farmers may wish to have the option to purchase the stake held by the Trust within a shorter timeframe. For the purposes of consultation, it is envisaged that the farmer would have the option to purchase the Trust s equity at fair market value after a defined period and with a defined notice period, as follows: for relatively smaller investments by the Trust (with an investment threshold to be defined as an outcome of the consultation process), six or more years after investment by the Trust, with two years notice being given after year four; and for relatively larger investments by the Trust, 10 or more years after investment by the Trust, with two years notice being given after year eight. The longer interval reflects the larger impact on Trust investors of having their investment repurchased by farmers. The Trust would have the same option as the farmer to sell its (typically minority) stake in the Farm-owning entity at the end of these intervals (with the same two year notice period). Farmers who prefer a longer time horizon could be offered the option of selecting a 10 year minimum interval regardless of the size of the initial Trust investment. As the Trust evolves, the above six and 10 year intervals (or other intervals determined after consultation) may change for new investments. Aside from these intervals, a farmer and the Trust could mutually agree at any time: that the farm be sold, with the proceeds disbursed or applied to purchase another farm; or that the farmer purchases the Trust s equity entirely; or that the Trust increases its investment. Fonterra would be involved in developing the foundation documents that define the mandate of the Trust and its relationship with Fonterra. However, once established, the Trust would be independently governed and managed. Investments by the Trust would be available to farms supplying milk to Fonterra in New Zealand and Australia. A small proportion of the Trust s total investment may be invested in farms that supply other processors to facilitate farmers becoming suppliers of Fonterra (for example once contractual obligations enable this) or to manage transition by farmers who choose to switch to another processor. The Trust would apply prudent investment rules in selecting farms in which it invests. Investment thresholds to channel equity to well-run enterprises with good prospects are important to protect the interests of Trust investors, and also to promote the future sustainability of the sector. Establishment of the Trust is dependent on the consultation process with suppliers and potential investors. Fonterra wants to be confident that the Trust would serve the interests of farmers and investors before proceeding. 3
WHAT IS PROPOSED AND WHY? BACKGROUND Fonterra is consulting on the merits of a Trust to provide an alternative source of long-term equity for its suppliers in New Zealand and Australia. The Trust would typically take a minority stake in the land and fixtures of a farm only, with farmers remaining in control of how their farming operations are run. A minority stake: benefits investors in the Trust because the majority owner will have a strong incentive to operate the farm efficiently to increase returns for the benefit of all equity investors; and reflects the Trust s role to facilitate investment by our farmers, not to displace them. To the extent that the development of farm operations requires capital investment in more land or fixtures (such as new farm tracks etc.) the Trust and the farmer would agree a programme for this to be funded by the jointlyowned Farm-owning entity....by using their collective strength and scale, Fonterra s shareholders can potentially benefit by the Co-operative facilitating a long-term partnership between the Trust and farmers in a way that best works for them as well as investors in the Fund. Financing choices depend on our farmers individual circumstances and goals. The two principal sources of finance are debt and equity. Equity is largely built up from our farmers own savings over the years, the creation of wealth due to appreciating land values, or in some cases through investments by others, including families and external equity partners. Unlike external debt, which typically shares a small proportion of a farmer s business risks, external providers of equity are exposed to the same downside risks as the farmer, in return for a share of any upside. Traditional sources of equity are important. But our farmers continue to face cash flow risk due to volatility in commodity prices, coupled with the need to reinvest to maintain business assets, improve farm productivity and meet industry and customer-led environmental benchmarks. These risks can be a burden in the early stages of developing or expanding a farming operation. In later stages, a farmer may wish to free up equity tied up in their business. That s why it is important for suppliers to have access to funding sources that are sufficiently flexible to match their individual circumstances through all stages of their farming career. Fonterra s scale enables farmers to benefit from the Co-operative efficiently channelling our suppliers milk to its highest value uses. By using their collective strength and scale, Fonterra s shareholders can potentially benefit by the Co-operative facilitating a long-term partnership between a Trust and farmers in a way that works best for them as well as investors in the Trust. The Trust would normally hold a minority equity stake in an entity that owns farm land and fixtures only, but some flexibility is envisaged. For example it may be helpful for the Trust to hold a majority stake for a period of time to facilitate the entry and exit of other shareholders. 4
POTENTIAL BENEFITS FOR FARMERS AND INVESTORS For farmers, the Trust offers a range of potential benefits, including: the ability to use equity provided by the Trust to grow earnings and production more rapidly, and at lower cash-flow risk than relying solely on debt and retained earnings; by reducing reliance on debt, particularly in early phases of farm development, farmers can reduce their personal and business risks that arise from milk price volatility, or disruptive changes to interest rates and the availability of debt (such as those which occurred during the global financial crisis); flexibility for farmers to release equity, subject to the Trust s investment parameters; and the Trust would be a long-term equity partner, with interests aligned to those of the farmer, and with clear engagement procedures and professional management. For investors, the Trust offers potential benefits that include: exposure to the New Zealand and Australia milk pool which has the largest southern hemisphere surplus to meet projected demand, particularly in China and emerging economies, as well as strong natural advantages including a temperate climate, a skilled and adaptable labour force, sound infrastructure, and a stable regulatory and political environment; access to an attractive real asset class that offers the potential of an inflation hedge; continued expected on-farm productivity growth through improved efficiency and maintenance of cost advantages; a Trust that is designed to partner with farmers who, because they typically retain majority ownership, are committed to their own success. The Trust will also benefit from that success; a high-quality outlet for milk in Fonterra which, as a co-operative, has long-term objectives that are aligned to its farmer shareholders; and a diversified investment in farms that reflect a variety of farming systems and that span regions across New Zealand and Australia, in contrast to a more concentrated exposure that arises from direct investment in farms. All examples and options canvassed are for discussion and do not represent a final view from Fonterra. If, after consultation, Fonterra proposes to support the establishment of an Equity Partnership Trust, its general features and detailed terms may differ materially from what is described in this material, reflecting among other things feedback from the consultative process. 5
HOW WOULD THE TRUST INVEST IN FARMS? An investment partnership between the Trust and our farmers The Trust would be available to Fonterra suppliers in New Zealand and Australia (including those supplying on contract) that meet the Trust s investment criteria. 1 These criteria would be applied at the time a new investment is considered and relate to a variety of factors that are likely to influence the success of the farm, including: the financial structure of the farming enterprise (level of gearing etc.); the historical financial performance of the farm, or its forecast performance in the case of conversions or planned farm expansion; the proven experience of the farm owner and/or operator in managing farming operations; the envisaged term of the investment as indicated by the farm owner; the quality of the farm infrastructure; sound environmental management and an assessment of other risks; and other standard investment criteria. FARM OPERATING ENTITY FONTERRA SHARES OPERATING ASSETS - LIVESTOCK OPERATING ASSETS - FARM MACHINERY Debt attributed to the Farm Operating Entity, by agreement between the farmer and the Trust Equity of the Farmer in the Operating Entity Total debt (secured by lender over all, or specified value, of operating assets and land/fixtures) FARM OWNING ENTITY Debt attributed to the Farm Ownership Entity, by agreement between farmer and Trust Total equity of the farmer ( farmer refers to an owner operator, farm syndicate, corporate or other form of ownership.) FARMLAND AND FIXTURES Equity of the Farmer in the Farm-owning Entity Equity of the Trust in the Farm-owning Entity Total equity of the Trust in land and fixtures via the Farm-owning entity. 1. Fonterra suppliers or farmers capture the various arrangements under which milk is supplied to Fonterra, for example under share-backed or Share up Over Time arrangements in New Zealand, or under contracts in Australia. 6
The envisaged basis upon which the Trust would invest is illustrated in the diagram (to left) and further explained below: The Trust and the farmer would agree on the terms of the Trust acquiring a (typically) minority stake in the farm s land and fixtures at an agreed value (for example, by reference to a registered valuation at the time of the Trust s investment undertaken by a valuer approved by the Trust and the farmer). Land and fixtures would include milk platform assets (tracks, races, fencing etc.) and mutually agreed runoff and support land. Land and fixtures would be held in a Farm-owning entity specific to that farm. Typically, the farmer would hold a majority equity stake in the Farm-owning entity with the Trust holding a minority stake. The farmer would own the herd, farm machinery and shares (held within the Farm-operating entity). The total farming enterprise (land, fixtures and other assets) would carry an agreed maximum amount of debt, which would be attributed to the Farm-operating entity (owned by the farmer) and the Farm-owning entity (owned by the farmer with the Trust). To safeguard their joint equity investment, the Trust and the farmer would also agree a maximum amount of debt going forward. These steps are not intended to hamper existing or future security arrangements of lenders, who may require that debt be secured against the assets of both entities. Consultation will continue with banks to ensure that the detail of Trust arrangements dovetail with their lending policies and procedures. A rolling capital investment programme (for example with a three-year horizon) related to land and fixtures would be agreed each year. These investments would be funded by the Farm-owning entity and the value of such improvements would be reflected in the market value of the land and accordingly the investment held by the farmer and the Trust. Capital investments would include maintenance of pasture quality through, for example, the application of capital fertiliser that sustains long-term productivity. The Farm-operating entity would continue to meet the Fonterra share standard as required and would exercise production-linked voting rights. Structuring a farming enterprise along the lines outlined above will incur set up costs (to which the Trust may make a contribution) and potentially add some additional complexity in farm management via reporting. To help reduce set up costs, the Trust would have a range of standard contracts and terms that could be modified to suit the various circumstances of farmers. The Trust and the farmer, as owners of the Farm-owning entity, would share in the annual earnings of the Farm-operating entity, primarily via a payment that varies with profitability. This would either be: by linking the payment to the Farmgate Milk Price; or by a payment related to the operating earnings (adjusted for tax) of the Farm-operating entity, after allowing for all costs and reasonable allowances, such as return on investment on operating assets (livestock and machinery etc.) and management fees. Under both alternatives, the basis for setting the payment would be agreed between the farmer and the Trust before the investment is made, reflecting the specific circumstances of the farming operation. The second alternative would demand more extensive reporting and is likely to be better suited to larger farming operations. The options offered for sharing operating earnings may change over time for new investments by the Trust as the industry evolves. In all cases, the annual amount earned by the Farm-owning entity, less any retentions to reduce debt or fund investments, would be distributed to the Trust and the farmer. 7
The approaches outlined on the preceding page and described in more detail in the following table are for consultation and, if taken further, would be developed in more detail in later stages. These approaches may change over time, or new approaches may be offered for fresh investments. The Farm-owning entity would receive a payment related to the Farmgate Milk Price The farmer would pay to the Farm-owning entity an annual payment set as a percentage of milk payments (being the Farmgate Milk Price x milk production) agreed prior to the investment. This approach provides a simple structure that can be applied on a large scale, with levels of oversight and monitoring costs that benefit the Trust and farmers. However, it may not always provide a return directly related to equity risks. For example, a Farmoperating entity may incur a loss but may still be required to make a payment based on the agreed percentage of the Milk Price. This could be accommodated by suspending payments in years when the Milk Price falls below a particular threshold. Given the longterm horizon of the investment, the farmer and the Trust would recover suspended payments from additional payments in future years when the Milk Price recovers. The Farm-owning entity would receive a payment related to the earnings of the Farm-operating entity The amount available to provide an annual return to the Farm-owning entity would be all revenues of the Farm-operating entity (but excluding dividends from Fonterra) less costs, including the following: an allowance for the management of the farm by the individual or corporate owner-operator; and an agreed allowance for a return on the carrying value of on-farm assets owned by the Farm-operating entity (such as livestock and machinery but not Fonterra shares). 2 This approach more closely aligns with an equity return in respect of investment in land and fixtures. However, it is more complex and may therefore be better suited to larger investments where existing financial and farm activity reporting are more likely to make it easier to administer. 2. The carrying value would be determined by reference to standard industry benchmarks of market value (e.g., in respect of livestock) and the book value of depreciable assets. To avoid double counting, the calculated return on operational assets would be reduced by the actual interest paid that is attributable to debt of the Farm-operating entity. It is envisaged that both dividends and the value of Fonterra shares would be ignored in these calculations. 8
FARM SALES AND THE SALE AND PURCHASE OF EQUITY STAKES It is anticipated that investors in the Trust will seek to invest in dairy enterprises over a very long time horizon. This is of benefit to those dairy farmers who take an equally long view of their investments. Farmers would therefore be entering into a medium to long-term joint commitment with the Trust. However at some point farmers may wish to purchase the stake held by the Trust within a shorter time horizon. This could occur at any time (and for any amount) if agreed between the farmer and the Trust. In addition, farmers could be offered the option to purchase the equity stake held by the Trust after a pre determined period and with an appropriate notice period. Obviously, the impact on the Trust is greater the more it has invested in the Farm-owning entity. Accordingly, the minimum investment period is likely to be longer for larger investments. It is intended to use the consultation process as a basis for informing what a reasonable distinction between small and large investments could be. For the purposes of consultation, it is envisaged that the farmer would have the option to purchase the Trust s equity at fair market value after a defined period and with a defined notice period, as follows: for relatively smaller investments by the Trust (with a threshold to be defined during the consultation process), six or more years after investment by the Trust, with two years notice being given after year four; and for relatively larger investments by the Trust, 10 or more years after investment by the Trust, with two years notice being given after year eight. The Trust would have the same option as the farmer to sell its (typically minority) stake in the Farm-owning entity at the end of these intervals (with the same two year notice period). Farmers who prefer a longer time horizon could be offered the option of selecting a 10 year minimum interval regardless of the size of the initial Trust investment. If the farmer triggers termination at the end of the six year interval, the farmer bear the resulting costs (e.g., for valuations, administrative costs of the Trust etc.). If the Trust triggers termination, or if the termination occurs after 10 years, the Trust would bear these costs. As the Trust evolves, the above six and 10 year intervals (if confirmed after consultation) may change for new investments. Aside from these intervals, a farmer and the Trust could mutually agree at any time (including before the specified six and 10 year intervals noted above) that: the farm be sold, with the proceeds disbursed or applied to purchase another farm; or the farmer purchases the Trust s equity entirely; or the Trust increases its investment. The Trust would aim to invest in high-quality farming operations that benefit both the farmer and investors in the Trust. But it will still be necessary to accommodate rare circumstances where a farming operation s performance is persistently below agreed benchmarks, despite remedial measures. In these circumstances, it is fair that investors in the Trust have reasonable protections. It is therefore envisaged that the Trust could require the farmer to purchase its equity stake in the case of persistent and substantial non-performance. If the farmer will not or cannot do so, this may result in the sale of the farm as a last resort after other options have been exhausted. Other than the circumstances noted above, it is impractical to devise rules to cover all potential situations. However, the Trust would be a long-term partner of Fonterra suppliers and would have a substantial investment exposure. It would be strongly motivated to act reasonably in accommodating changed circumstances of farmers with whom it co-invests in order to retain and attract new farmer-partners. 9
SUMMARY OF KEY FEATURES The table below sets out in summary form how some of the decisions in respect of farming operations would be made under the approach outlined above. Farm-operating entity Farm-owning entity Capital structure (levels of debt, significant additional borrowing) Maximum amount of debt and new borrowings agreed by the Trust and the farmer Maximum amount of debt and new borrowings agreed by the Trust and the farmer Capital expenditure Made by the farmer Agreed by the farmer and the Trust (e.g., under a three-year plan and annual budget) Drawings By the farmer, operating within the agreed earnings sharing framework Not applicable because profits distributed by dividends Dividend on Fonterra shares Received by the Farm-operating entity (farmer) that owns the shares None Voting on Fonterra shares By the Farm-operating entity (farmer) None Debt repayments Made by the farmer Agreed between the farmer and the Trust Maintenance of productive capacity Minimum assets to maintain productive capacity agreed between the farmer and the Trust (e.g., herd size) Minimum assets to maintain productive capacity agreed between the farmer and the Trust (e.g., farm buildings, infrastructure, races, fencing etc.) Decisions on amount of dividends paid By the farmer Agreed by farmer and the Trust Farm working expenses By the farmer Not applicable 10
HOW WOULD THE TRUST BE GOVERNED? It is envisaged the Trust would have a conventional governance structure which promotes accountability and transparent performance assessment, and is independent from Fonterra. The intention is for the Trust to be established as a New Zealand domiciled unlisted managed investment scheme. Units in the Trust would be issued to institutional investors in New Zealand, Australia and elsewhere with an appetite for passive long-term equity exposure to New Zealand and Australian dairy farming. The initial amount of capital raised would reflect both assessed near-term farmer demand for Trust investment and other practical constraints, with subsequent capital commitments called to meet farmer demand for Trust investment consistent with the investment strategy of the Trust. A Trust Deed would be the founding document of the Trust, and would specify a range of parameters including the Trust s investment strategy and the process for selecting, assessing and rewarding the Trust Manager. The Trust documents would incorporate a narrow range of terms that would require approval of Fonterra s Board to amend (notably including a required minimum proportion of the Trust s assets to be invested in the farming operations of Fonterra suppliers). Framing these terms will be subject to consultation with Fonterra s suppliers and potential investors in the Trust. Other than these aspects, after formation the Trust would operate at arms-length from Fonterra. The independence of the Trust is important both for Fonterra s farmers and for investors. A Trust Deed will be the founding document of the Trust, and will specify a range of parameters including the Trust s investment strategy and the process for selecting, assessing and rewarding the Trust Manager. In accordance with conventional practice, the Trust Manager will act in the best interests of the Trust s investors based on best practice Trust management and asset management processes and protocols. It would have sole responsibility for the operation of the Trust, including prioritising and negotiating investments, monitoring on-farm performance against an annual budget (at a minimum), and ongoing reporting of Trust performance to investors. A fundamental aspect of the Trust Manager s role would be managing financial risk, which would include maintaining an appropriate level of portfolio diversity (including investment size, geographic location, etc.). 11
The Trust Manager would earn a management fee from the Trust that provides reasonable compensation for the services provided and for taking on fiduciary duties for long term investors, with the ability to earn a performance fee over time for Trust performance that exceeds specified investment return benchmarks. The professional Trust Manager would be appointed following a contestable process and be accountable to an independent Board, which is ultimately responsible for ensuring compliance with the Trust Deed and other contractual obligations and investor protections. The Board would comprise of a majority of New Zealand resident directors with a diverse range of expertise and experience (including dairy farm management). The Trust would have the ability to terminate the Trust Manager contract in certain circumstances (e.g. for failure to remedy a breach of certain performance criteria). An overview of the envisaged Trust governance structure is illustrated below. INVESTORS Vote Equity Distributions BOARD OF TRUSTEES MANAGER Services Fees EQUITY PARTNERSHIP TRUST ( TRUST ) TRUST DEED Equity Distributions FARMERS Equity Distributions FARM OWNING ENTITIES 12
OVERSEAS INVESTMENT RULES The Trust would be designed having regard to: the Overseas Investment Act 2005 which governs foreign investment into New Zealand; and Foreign Acquisitions and Takeovers Regulations for investments in Australia. In the New Zealand context, the goal would be to design the terms of the Trust so that it can successfully apply for an exemption from the need to gain approval under the Overseas Investment Act 2005 each time the Trust invests in farming operations in New Zealand. It is also envisaged that there would be a cap on the maximum investment in the Trust by any one investor. Subject to these conditions, the Trust would be open to professional institutional investors from New Zealand, Australia and elsewhere. 13
HOW CAN I HAVE INPUT DURING THE CONSULTATION PROCESS? Fonterra will be conducting a formal consultation with its farmers and potential investors on whether the Trust would be of benefit to them. The consultation approach has been designed to ensure all Fonterra farmers have an opportunity to share their views, and contribute to the development of the Trust. Consulting widely will enable the Trust to suit as wide a range of our farmers as possible. To register your interest to participate in the current consultation process, email us at nzfarmsource@fonterra.com For more information online go to the Equity Partnership Trust page within your financial toolbox at nzfarmsource.co.nz PREPARATION FOR CONSULTATIVE PROCESS CONSULTATIVE PROCESS WITH STAKEHOLDERS CONSULTATION WITH SUPPLIER GROUPS CONSULTATION GROUP FOR POTENTIAL INVESTORS Consultative Panel of Farm Consultants / Equity Manager NZ Farmer Evaluation Group Potential Trust Investors contact group NZ and Large Herd Stakeholder Māori Evaluation Group Australia Farmer Evaluation Group Farm Source Direct Access/Feedback CONSIDERATION OF FEEDBACK GO / NO-GO DECISION BY BOARD ANNOUNCEMENT 14
The planned groups for consultation are: Farm Source Feedback: Farmers who wish to participate in the current consultation process can register their interest by email at nzfarmsource@fonterra.com. In the final stages of consultation all Fonterra farmers will be invited to take part in a formal survey on the final design. New Zealand Farmer Evaluation Group: This group will represent a full cross section of our New Zealand farmers. Consultation will include providing detailed and structured feedback on the proposal as it develops via small group discussions and larger scale workshops. We envisage around 35 small group discussions and 7-10 workshops across New Zealand over the course of the consultation period. Australian Farmer Evaluation Group: A mix of 5 7 small group discussions and 4-5 larger scale workshops with Australian suppliers, based broadly on the New Zealand Farmer Evaluation Group model. Māori Evaluation Group: Māori dairy farming enterprises may have specific issues that need to be taken into account in designing the terms on which equity is available through the Trust. A portion of the small discussion groups within the NZ Farmer Evaluation Group would be dedicated to Maori Enterprises to enable feedback. Large Farming Enterprises: This would be a group that reflects larger farming enterprises within New Zealand and Australia again, with the goal of tailoring the terms by which equity is made available to their circumstances. Consultation will be conducted via one-on-one interviews and discussions. Farm consultants & Equity Syndicate Farm Managers: Farm consultants will know the circumstances of a wide range of farmers. Farming equity syndicates could have access to equity from the Trust. In addition to specific meetings, rural professionals (such as accountants and lawyers) could provide feedback on the proposal as the detail is developed via a series of breakfast sessions. We will also consult with potential Trust investors in New Zealand, Australia and elsewhere so that the design of the Trust, once developed, meets their requirements as well as those of our farmers. In addition, consultation with other relevant stakeholder and industry groups will be conducted. We anticipate that the consultative groups will be established by mid November. During that time, Fonterra will also retain experts in the design and operation of Trusts of this kind to assist the Board. Consultation will begin in mid November following the establishment of consultative groups. In addition to feedback on the design of the Trust, we will be asking both farmers and investors to indicate if they would be interested in using the Trust. This is simply to gauge interest and is not binding. Consultation will continue until the Fonterra Board is satisfied it has sufficient feedback to decide whether there is merit in establishing the Trust. The Fonterra Board expects to be in a position to make this decision in the first few months of 2015, and will explain the decision it makes. If the Fonterra Board decides at that time to proceed, the process of forming the Trust would commence. Only when the Trust is established will applications from farmers for equity by the Trust be invited. Such a process would occur in conjunction with investors being invited to invest in the Trust. 15
FREQUENTLY ASKED QUESTIONS How will the Trust be targeted at Fonterra shareholders and suppliers? Fonterra facilitating the formation of the Trust is intended to widen funding options for its shareholders and suppliers in New Zealand and Australia, while offering an attractive investment for investors in the Trust. Accordingly, it will only be available for current shareholders and suppliers, or those who are committed to becoming suppliers. Some farmers who have earlier utilised the Trust may terminate their supply and shareholding relationship with Fonterra and switch to another processor. It is important that the Trust have adequate time to manage the transition period over which the Trust exits its equity stake in their farming operation at market value. It is therefore envisaged that a high proportion of milksolids of farms in which the Trust invests must be supplied to Fonterra. This would enable the Trust Manager to exercise discretion in transitioning a farmer into, and out of, a supply relationship with Fonterra on terms that are optimal for the Trust and for affected farmers. Are there any circumstances where the Trust may wish to invest other than in land and fixtures? Investment in land and fixtures would be the typical arrangement, with benefits including leaving the farmer free to operate the farm day to day, and reducing the extent of governance oversight and reporting. However, it is intended to explore circumstances where the Trust could potentially invest in fixtures (such as farm dairy facilities, farm races and other infrastructure) separately from its stake in the underlying land (which may be to a lesser extent than its stake in fixtures). The reason to explore this is that this may enable the Trust and land owners to benefit from productivity improvements through the consolidation of farming operations across several land titles. These circumstances may apply to some Māori-owned land, for example. Of course, projected equity returns from any investment by the Trust would need to meet its investment criteria. By what date could be the Trust be established? It is too soon to estimate a time when a Trust, if established, could commence investment. There are various stages of consultation to work through. If the Fonterra Board agrees to facilitate the formation of the Trust significant time would be required to finalise its terms and address regulatory requirements under foreign investment rules in New Zealand and Australia. This would be followed by a process of the Trust receiving applications for equity investments, and investors committing to the Trust. It therefore is unlikely that the Trust would be in place for the beginning of the 2015/16 Season. However, it may be possible for the Trust to begin investing part way through a season, particularly where it is making a minority investment in existing farm operations. 16
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