The cooperative is owned by some 11,000 farmer shareholders in New Zealand (96 per cent of the country's dairy farmers), who supply it with milk and, in return most of the income is distributed among them. It was formed six years ago out of a three-way merger between New Zealand Dairy Board, New Zealand Dairy Group and Kiwi Co-operative Dairies. However the board of directors has been weighing up six options for changing its capital structure with a view to ensuring it stays relevant, competitive and adaptable in the changing dairy market. Value-added opportunities High dairy prices and growth in markets like China, where a wealthy middle class is emerging thanks to economic development, mean that the global dairy market is changing fast. "We're facing significant opportunities to create value and the biggest growth opportunities we are seeing are around fresh milk and behind borders," said chairman of the board Henry van der Heyden. "We are well positioned to participate in that growth and our preferred capital structure offering would provide the capital to fuel our growth in the future." Furthermore, interest in nutrition puts the spotlight on value-added dairy products, and there is an opportunity to develop dairy-based ingredients that go beyond basic health and technical functionalities. Two separate companies The capital structure plan would see the Dairy Co-operative listing its business operations in a separate company, while maintaining a controlling interest. The Farmer cooperative would remain 100 per cent owned and controlled by farmer shareholders, but all the assets, liabilities and operations of the cooperation would shift over to a second company. The plan is for this second company to be farmer-owned for two years, but ultimately for shares in this to be listed on the New Zealand stock exchange. The farmers would own about 80 per cent of the listed entity - 65 per cent through the cooperative and 15 per cent through their shareholding. The remaining 20 per cent would be up for sale to the public. The other five options mulled by the board involved splitting the business in other ways, or combining parts into a listed entity. But the preferred plan was said to be the only one that addresses three pressure points in its current structure: redemption risk, investment choice for the farmers and the need to stay competitive in the changing market climate. It would also allow it to remain an integrated business - and such integration is seen as vital to its growth strategy. Van der Heyden said the option represents an evolution of the cooperative, at a time when it needs top be bold and brave. With regard to the changing dairy market, he said: "We have bitten off these challenges before, and added value to the cooperative. We just have to do it again." Record pay-out Two months ago, the cooperative announced a record pay out to its suppliers of milk solids, of NZ$6.40 per kilogram. While van der Heyden said this payout was good for farmers, it does not give the cooperative the money it needs to make its growth strategy a reality. "It may lessen the redemption risk for a while, but that is debatable as our shareholders can choose to redeem their shares regardless of the level of payout," he said, adding that the payout level does not address shareholder investment choice. A two-year process The consultation process will involve two shareholder votes, with the first expected to take place in May next year. This will be on whether to change the structure of the business to two entities, and introduce a more transparent milk pricing mechanism. At least 75 per cent shareholder approval will be required for the proposal to pass through to the second stage. Seventy-five per cent will also be required for the second vote, which would take place in 2010, on whether Fonterra should list on the stock exchange and introduce external capital. If approval were given, two shares would replace Fonterra's current share - milk supply-based shares in the Farmer Cooperative and shares in the listed entity. Fonterra has said that it will consult with the shareholders before the first vote in a series of smaller meetings.