Fonterra's dairy farmers have given the green light to a proposal to start share trading among farmers.

The landmark announcement made at a special meeting in Palmerston North this afternoon means Fonterra will no longer buy and sell shares from farmers based on their level of production.

Fonterra chairman, Sir Henry van der Heyden said an overwhelming majority of voters - 89.85 per cent - supported the resolution.

The company's 10,500 farmer shareholders have been voting by post and internet for the past two weeks on whether to change their constitution to allow them to trade shares among themselves.

The scheme that will create a restricted market in Fonterra's shares and remove the need for it to set aside funds to pay out those either reducing their milk production or exiting the co-operative.

After milk production fell during the 2007/08 drought, Fonterra had to pay out $742 million of equity to farmers via redemptions.

Van der Heyden said the move to the 'Trading Among Farmers' scheme would be "a lasting solution that could remain at the core of our co-op's capital structure for many years to come.

"Effectively our vote today for Trading Among Farmers will, together with the co-op's new retention policy, take capital structure off the table for the foreseeable future."

Sharemilker and equity partnership dairy farmer Hugh Candy, who was at the Hamilton meeting, said there was a feeling of unity of Fonterra moving forward and that every farmer counted.

"The communication with Fonterra has been brilliant from the farmer perspective.

"Every farmer has a voice no matter their size and their vote counts," he said.

Van der Heyden said support for the change showed a clear awareness and understanding among farmers of the need to evolve and further strengthen Fonterra's capital structure.

"We knew when Fonterra was formed nine years ago that we would need to evolve our co-op's capital structure and develop a durable solution to address redemption risk.

Fonterra's Shareholders' Council issued a press release saying the vote was a "great outcome" for the co-op.

"Successful implementation of the scheme would give Fonterra Among "a stable platform while making sure the business remains owned and controlled by farmers," said council chairman Blue Read.

"These initiatives will bring a new set of stakeholders into the dairy arena and there are preconditions that must be met before Trading Among Farmers can be introduced. The preconditions have been developed so that the interests of Fonterra farmers and all stakeholders can be safeguarded."

"Farmers are at the heart of Fonterra. The Council is confident this proposal will ensure our co-operative continues to be farmer owned, farmer controlled and farmer focused," said Read in a speech at today's shareholders meeting.

Van der Heyden said the scheme would "stop money washing in and out of Fonterra's balance sheet from season to season and provide permanent capital to grow returns."

"As farmers we'll also know exactly what a Fonterra share is worth at any time. We'll have the flexibility to buy and sell shares when it suits our cash flows. And we'll have the choice to free-up some of our share capital through the Fonterra Shareholders' Fund.

"Trading Among Farmers will ensure Fonterra remains farmer controlled and owned, and that our loyal shareholders have an incentive to hold Fonterra shares and put more equity into our co-op," he said.

Chief executive Andrew Ferrier said with permanent capital Fonterra would be better-placed to take the long-term business and investment decisions to shape the co-operative's ongoing success.

He said Fonterra was "in a great place" with its reputation globally as a leading dairy provider, a strong business footprint and brand presence in the world's fastest-growing dairy markets.

"With a permanent and stable capital base, we can invest with confidence in long-term opportunities that build on our global competitive advantage and maximise the returns to our farmers for their milk - without the fear the money might be needed to fund redemptions," Ferrier said.

Federated Farmers dairy chairperson Lachlan McKenzie described the announcement as a red letter day for New Zealand's dairy industry and for the Fonterra Cooperative Group.

"We have a decisive yes vote to commence internal share trading. This secured nearly 90 percent approval off a turnout of just under 78 percent. Given that's almost the same turnout as for the 2008 general election, I'm safe to say it's decisive."

McKenzie also commended Fonterra's board, who had given shareholders the confidence they needed to vote yes by the way they handled the consultation process.

Farmer share-trading

What is it?

* Dairy farmer co-operative Fonterra was formed in 2001.

* At present, dairy farmers have to buy shares in Fonterra based on the level of their production.

* Under the proposal farmers would buy and sell shares among themselves through a Fonterra Shareholders' Market, rather than with Fonterra.

* A Fonterra Shareholders Fund would also be set up to enable farmers to sell the share benefits of distributions and changes in value but retain voting and milk payment rights.

* Farmers could be allowed to buy dry shares that do not have voting rights for up to 200 per cent of their production level.

Why do it?

* Remove the redemption risk of Fonterra having to pay farmers when they cash in shares.

* Provide the company with permanent share capital.

What's next?

* Proposal for share trading needs 75 per cent support. Farmers had the option of voting by post, on the internet or at today's special meetings around the country.

* It is expected to take at least 15 months to implement.