Fonterra began consulting on proposed changes to its capital structure on Thursday, with the company suggesting moves be taken to protect farmer ownership and control of the company.
It comes after the dairy co-op announced a trading halt on Wednesday ahead of the consultation process.
The trading halt, which affects Fonterra's shares on the New Zealand and Australian stock exchanges, will remain in place until markets open on Friday to give shareholders "a full day to review and consider the materials before trading".
The company said while farmers continue to consider all options, it would temporarily be capping the size of the Fonterra Shareholders' Fund by suspending shares in the Shareholders' Market from being exchanged into units in the fund.
Fonterra's chairman Peter McBride said that decision, and others already taken by the company, "haven't been taken lightly".
"We appreciate they will have come as a surprise, but they are necessary to keep all our options open while the co-op's farmer shareholders have a free and frank conversation about our capital structure."
He said the proposed capital structure changes were a response to the fact the environment Fonterra is operating in had changed a lot over the past 10 years and milk supply was no longer expected to continue growing.
"The co-operative's current structure was put in place when milk supply was growing rapidly in New Zealand.
"It now needs to be prepared for flat or potentially declining milk supply as a result of factors such as climate change impacts, regulatory changes, and alternative land uses."
The company said it is consulting on a number of options, including staying with the current structure.
But the board's preferred option is a "reduced share standard with either no fund or a capped fund".
"We believe the best option for our co-op is to move to a structure that reduces the number of shares a farmer would be required to have and either removes the fund or caps it from growing further, to protect farmer ownership and control," McBride said.
He said the changes would make it easier for new farmers to join the co-op and give greater flexibility to farmers wanting to free up capital or who are working through succession.
"A key outcome of this change is that shares would be bought and sold between farmers in a farmer-only market," he said.
"I want to be clear that these changes could impact the price at which shares in our co-op are traded, and there may not be as much liquidity in the market. Ultimately the price for farmers’ shares would be determined by the performance of the co-op and trading between farmers.
"We believe this is a more sustainable proposition over the longer term than the alternatives we are confronted with."
The company said farmers in the co-op would have the chance to share their views on the proposed changes over the coming months. If the appetite for change remains, more work would then be done to refine the preferred option before a second round of consultation.
"If the board decides to seek change to the co-operative's capital structure, it would likely aim for a farmer vote around the time of the annual meeting in November and the approval of 75 percent of votes from voting farmers would be required.
"If the preferred outcome is to buy back the fund, it would also require the approval of 75 percent of votes from voting unit holders."