Fonterra has recently announced the proposed sale of their consumer brands businesses to Lactalis, a French owned multinational dairy company.  The divestment strategy of Fonterra’s consumer brands businesses was confirmed in May 2024 with the reason to focus on ingredients and foodservice businesses.  The sale includes Fonterra’s global consumer business (excluding Greater China), as well as foodservice and ingredients businesses in Oceania, Sri Lanka, Africa and the Middle East. The brands involved in this deal include Mainland, Kapiti, and Anchor among others. 

The proposed sale is expected to be voted on by Fonterra farmer shareholders in late October 2025 or early November 2025.  The sale price is estimated to be in the value of $4.2 billion New Zealand dollars, of which a capital return payment is anticipated to be paid to Fonterra shareholders once the sale is complete.

As part of the sale, Fonterra is obligated, in the long-term, to continue the supply of milk and ingredients for these consumer brands.  In terms of milk supply quantities, nothing will change for Fonterra farmers as a result of this proposed sale.

Capital return payment to Fonterra shareholders

Provided the sale is approved by regulatory authorities and Fonterra shareholders, the timing of the capital return payment of $2 per share to farmers is anticipated to be mid-2026. 

A capital return is a way for a company to distribute funds to shareholders by returning part of their original investment (share value).  This differs from paying out profits as dividend income, which is usually taxable. In Fonterra’s case, the proposed capital return will be executed by cancelling shares and paying shareholders $2 per share in exchange for the cancelled shares.

Regulatory Steps Required From Now

Fonterra has provided a press release detailing the proposed sale on their website (hyperlink –  https://www.fonterra.com/nz/en/our-stories/media/fonterra-agrees-sale-of-consumer-and-associated-businesses-to-lactalis.html ) and farmer shareholders are expected to receive a Notice of Special Meeting early next month. Fonterra farmer shareholders will vote to either approve or not support the proposed sale.

Regulatory authorities from both New Zealand and internationally must also approve the sale.  These approvals are required for compliance of competition laws and to ensure the sale agreement meets laws and regulations of all stakeholder countries.

Planning ahead – on farm and off farm

It is a busy time on farm with calving  virtually finished for most farmers and milk production in full swing. Although no immediate action is required by farmers in relation to the proposed sale, we recommend that you consider what the capital return payment could mean for you and how it could be best utilised.

Here are some options to consider.

1. Pay off debt or restructure debt

The capital return could be used to pay short term debt such as an overdraft or debt with high interest rates such as equipment or hire purchase loans.  Using the additional funds to assist with the daily running costs of the farm improves working capital by contributing to paying bills and potentially paying less interest.

An improved balance sheet with less debt could facilitate an interest rate review with your lender, which may help improve profitability and reduce interest costs.  In recent years interest rate increases have motivated many farmers to reduce their debt levels in an attempt to keep interest costs lower and/or more under their control.  Our team can assist you to provide financial information when your bank is undertaking an interest rate review or restructuring your lending.

As well as debt repayment, we have found income tax payable for the 2024-2025 season has increased for many farmers.  It is prudent to understand your tax position including likely tax obligations for the current season.  Where there are tax arrears from prior years or a shortfall of tax paid for the 2025 financial year then a capital  payment could assist to improve the overall tax position.

2. Invest back in the farm

Addressing deferred repairs and maintenance or upgrading cowsheds, effluent systems or farm cottages are some examples of using the capital return to invest in maintaining and improving your farm.  Rural support businesses are likely to benefit also from the increase in spending on farms to repair, improve, upgrade or replace assets. 

Creating a capital expenditure plan or wish list can help you evaluate which areas are most urgent and which areas will help improve farm efficiency, with the goal to increase future profitability.  Modern farming technologies such as wearables and pasture drones have anecdotally proven to improve productivity, reduce waste and save money and time.  Perhaps now is the time to further investigate some technology options that would best help meet your farm goals.

Not everything can be done at once and some projects need the right season to implement and undertake.  When preparing your upcoming season’s cashflow forecast including these expenditure items, as well as the capital return, will help you plan the timing of cash inflows and outflows.

3. Expansion and new opportunities

Along with the additional funds, it may be the right time for some farmers to consider new opportunities such as:

1. 1. purchasing another farm or upsizing the existing farm
   2. increasing and improving herd numbers – either by breeding and holding more replacements or purchasing livestock
   3. purchase a finishing or run off block to complement your existing farm operation
   4. starting a joint venture with an existing sharemilker or contract milker who is aspiring for the next step in their farming journey

4. Succession and Exit planning

The average age of a dairy farmer has increased.  Planning for succession or an exit plan from active farming is a process that can take years to implement.  For many farmers this process is already underway or will be relevant to them in the near future.  The capital return payment could be used as part of your succession plan.

For those multi-generational farms there can be children that have made a life for themselves outside of the farm and have no interest in taking on the farming operation.  Fonterra’s capital return may be able to be utilised to help balance with non-farming siblings, potentially in the near or distant future.  We understand that every farm, farming family and succession plan is different and unique – non-farming children will  be a factor for some succession plans and not for others.  Our team are experts at assisting farmers plan for succession, and we work closely with all parties involved throughout the process. 

5. Stepping out of the cowshed

With high prices of livestock, strong cash flows and the possible capital dividend could create the opportunity to step away from the routine of milking the cows.  It is a great time to look at these scenarios if the time is right for you, the ability to have a sharemilker or a contract milker.  Even the opportunity to employ that labour unit to make it easier to run the farm.    Working closely with your Accountant can highlight the options available here.

6. Investing off farm

Diversifying investments and wealth off farm can form part of retiring farmer’s future income.  There are many options including investing in a portfolio or share market, purchasing or investing in other businesses, purchasing a rental property or keeping funds in a savings account or term deposit.  A financial adviser is the best person to engage with to discuss, plan and advise on options.

Farmers have high workloads with many urgent jobs to sort on a daily basis on farm and taking time to plan how best to use cash profits from trading or a proposed capital return payment may not come to the forefront.  We have outlined some ideas on what to consider or start thinking about.  The consumer brands business sale by Fonterra to Lactalis is not confirmed and the proposed payment is not expected to be paid to farmers until mid-2026 so there is plenty of time to plan and decide.

Key Takeaways

Fonterra’s proposed sale of their consumer brands businesses to Lactalis is in progress and not confirmed or completed.  The indicated tax free $2 per share capital payment to shareholders presents an opportunity for farmers to use in a variety of ways, either reinvestment into farm or outside of farming operations. 

When the time is right for you, our team are here to assist with next season’s cashflow forecast and budgeting, succession and exit planning, alternative structures and financial insights from our extensive agri-accounting experience.