Farmers get chance to trade on growth

Dairy Investment says it offers farmers a way to cash in on their shares without leaving the co-operative. Picture / Simon Baker

Dairy farmers will be able to trade the future growth of their Fonterra shares for cash as part of a scheme being launched this week by private equity group Dairy Investment Fund.

The fund plans to pay farmers for the rights to the "value-added" portion of their shares.

Fonterra's co-operative structure means shares can only be owned by farmer suppliers. But fund manager Geoff Taylor said Dairy Investment would establish contracts with farmers to take any capital gain on the shares in return for cash.

The fund would realise that value when the farmers eventually sold their farms or sold out of the co-operative.

The ongoing cost to the farmer would be the forfeiting of the value-added portion of their payout - effectively the dividend they receive for the capital they have tied up in Fonterra's international consumer products business.

The Fonterra share price - which is set each year by an independent valuer - has risen consistently since the co-operative was formed. In 2001 it was valued at $3.85; last year the value was $5.44.

The rising price has been a source of tension within the co-operative, with a small but vocal group of farmers unhappy that they are required to have such a large chunk of capital tied up in its consumer business - called Fonterra brands.

Taylor said the fund would offer those farmers an alternative way to cash in on the shares without resorting to leaving the co-operative.

The fund was not targeting small family farms and would probably be most useful to corporate farmers looking for capital to make alternative investments.

Fonterra Shareholders Council chairman John Monaghan said a small group of farmers might find the product interesting. They would have to make an independent assessment of the risks and rewards.

He said neither Fonterra nor the council was in the business of giving that sort of financial advice.

Taylor said on the investment side the fund had enough capital for its immediate plans through a small group of private investors.

But once the scheme was up and running, it was possible that they could look to raise more capital to expand it to a wider pool of investors.

At present, Dairy Investment's most significant stake is 10 per cent of Waikato dairy company Open Country Cheese.

Dairy Investment has plans to expand the the scheme to farmers with shares in other co-operatives such as Livestock Improvement and Westland Dairy.

It is also planning to offer farmers a hedging mechanism which would allow them to lock in a milk price at the start of the season.

At present, farmers are at the mercy of the Fonterra board which puts out milk price forecasts during the season.

The Dairy Investment board of directors consists of Taylor, Peter Schuyt and Tim Gibson.

FONTERRA LURE

* Farmers who don't want capital tied up in Fonterra's consumer products business will be able to trade that equity for cash.

* They will retain ownership of the shares but contract out their right to equity gains and dividends.

* The fund also plans to offer a hedging mechanism to allow farmers to lock in a fixed milk price at the start of the season.