Fonterra's plan explained

Photo / Brett Phibbs

Fonterra has revealed details of its plan for dairy farmers to trade shares amongst themselves.

Farmers had thrown out a 2007 proposal for a partial public listing on the stock exchange.

What is the new scheme?

Under the scheme, farmers will be able to trade shares in Fonterra between themselves.

Farmers are already able to buy shares to the value of 120 per cent of their expected milk production.

Today's announcement will allow farmers to trade shares amongst themselves, rather than relying on Fonterra to buy shares back.

This is the third step in a restructuring. The first two steps in the current capital change process allowed farmers to own more shares than required by their production and changed the way shares were valued to recognise the market was restricted to the co-operative's farmer owners.

The first two steps received nearly 90 per cent support from farmers in November and the move to farmer trading would need 75 per cent approval from shareholders.

Why the new scheme?

Fonterra introduced the scheme after about 90 per cent of farmers voted in favour last November.

Fonterra hopes the scheme will free up capital for the company because it will no longer have to buy shares off farmers. Instead other farmers will buy the shares.

What has the take-up been like?

As of January, about one third of Fonterra's farmer shareholders had spent $270.7 million buying up new shares.

Out of Fonterra's 10,500 farmer shareholders, 3,461 have subscribed for a total of 60 million shares worth $270.7 million both to cover anticipated increases in production for the current season and as additional or "dry" shares in excess of production, while 59 applied to surrender a total of 1.6 million shares worth $7.3 million.

What are the benefits of the new scheme?

The scheme allows Fonterra to free up its balance sheet. Instead of having to pay farmers for shares, the co-operative can now spend the money on expansion.

Until now farmers have had to hold enough shares to cover the volume of their milkflows, and when those milkflows drop because of drought, selling up to 20 per cent of their production to another company, or quitting the cooperative, Fonterra has had to find the cash to pay out the unused shares.

This exposure to "redemption risk" has cost the cooperative $1.9 billion in the past two years.

Fonterra Chairman Sir Henry van der Heyden said Trading among farmers would also provide more flexibility for farmer shareholders to run their businesses with farmers being able to buy in the good times and sell in the bad.

What are the concerns?

Federated Farmers dairy chairman Lachlan McKenzie said farmers will be wary of the proposal if they feel it is softening them up to agree to publicly listing the cooperative.

He estimated only 50 per cent of farmers would be able to afford to buy extra shares. He said farmers always had things on their own property that needed investment.