KEY POINTS:
The Government has posed some multi-million-dollar questions with its ideas for the way the Fonterra-controlled export dairy quota market will work once current arrangements start expiring from this year.
Given the quota market is probably worth at least $600 million annually - and generates tens of millions of
dollars of quota-specific profits or "rents" - the final system is a big issue for Fonterra and rivals such as Open Country Cheese, Tatua and Westland.
The rents are the extra earnings resulting from the fact that goods exported under quota generally face lower tariffs, allowing for the extra margin to be pocketed.
Fonterra took control of the quota markets in a deal with Tatua and Westland.
Although the rents have declined significantly, they were still worth nearly $50 million last season and added 4c/kg of milk solids to Fonterra farmers' payouts.
This year, the companies made a confidential joint submission - containing sometimes differing views - to the Government on the way ahead.
Now Agriculture Minister Jim Anderton has invited opinions on a plan for the Government to allocate quota to a range of exporters for cheese and butter to the EU, to US markets where New Zealand is able to decide who it will import through, and for milk powder to the Dominican Republic.
For these markets, the Government believes it would be possible to enforce quota shares legally. But exactly how to allocate quota is what is up for discussion.
Based on the domestic market share-related options in an Anderton letter to sector stakeholders, it seems clear Fonterra looks likely to retain the lion's share of quota.
The letter also argues against letting absolute minnows into these administratively allocated markets.
"We need to balance the opportunities for dairy industry participants ... with ensuring the amounts of quota access allocated to companies are not of a trivial size. The benefits to a participant should clearly exceed the administration costs of achieving that outcome."
True, but the guaranteed access quota provides also sets up a basis from which to market other products, so it will be interesting to see how the Government deals with any arguments along these lines.
On the issue of how long quota rights would last, the letter notes a need to balance efficiency, certainty and fairness to existing and new companies, and those with growing or declining market share.
The letter argues a longer-term allocation of seven to 10 years would give greater certainty to companies about ownership rights and provide stronger incentives to invest in market development. But it also suggests rights to these markets be tradeable.
Taking the longer-term approach may frustrate some of the smaller companies if they were backing themselves to make rapid gains in domestic market share.
For the rest of the quota markets - Japan, US markets where New Zealand can't control who imports product, plus Canada and low-fat cheese to the US - the letter effectively suggests the quota gets to be filled by whoever gets their product in first.
Legislation to effect changes is expected to be introduced to Parliament mid-year.
Fonterra's rivals have been keen to see the carve-up of quota done fairly. So there may be some sharp behind-the-scenes negotiating to be done before that legislation gets to the House. Direct or indirect lobbying by foreign commercial interests is also possible.
Dash Done
Mike Petersen, the deputy chairman of industry body Meat & Wool New Zealand, is expected to succeed chairman Jeff Grant when he finishes this month. Grant - who will also step down as Meat Board chairman - has signalled for some time he would leave the chairman's roles, but will continue as a director until next year.
Petersen is seen as the hot favourite to replace him at Meat & Wool.
Grant has been board chairman since 2001 and became the first chairman of Meat & Wool when it was formed in 2003.
Experience Counting
The less-than-stellar trading in LIC shares since the dairy sector co-op listed on the NZAX several years ago may be an experience Fonterra will take on board as it contemplates changes to its capital structure.
A suggestion from a number of Waikato farmers is for a share relating to the value-added part of Fonterra's business to be tradeable between co-op members.
The value-add business relates to returns from such activities as branded consumer products and there has been dissatisfaction over the level of these returns.
Allowing trading in value-add shares would let disgruntled farmers sell out to others in the co-op who want to stay aboard.
LIC has tradeable investment shares - without voting rights - allowing co-op members, within limits, to buy off or sell to other dairy farmers and sharemilkers, thereby unlocking capital or opting out of some of their exposure to LIC.
But trading among LIC's 11,000-odd shareholders has been lacklustre, even though shares have been trading at a significant discount to net tangible asset backing. That's partly a reflection of the restrictions on who can hold shares.
If Fonterra decides a split share system and trading is desirable - to help farmers unlock capital and ease the risk they will cash in shares directly with the co-op - the LIC experience suggests limiting tradeability to existing shareholders may not be that effective.
But there are also concerns about opening Fonterra shares to the public, even in a limited way, if this threatened or diluted farmer control.
LIC's chief executive Mark Dewdney - a former Fonterra executive - wasn't keen to give an opinion on whether his co-op's experiences offer any lessons to Fonterra.
"There are cleverer people than me inside Fonterra thinking about that all the time."
Allied Farmers
North Island farm services and finance company Allied Farmers is looking to raise as much as $30 million to exploit a range of unspecified opportunities.
The listed, mostly farmer-owned firm has called a special meeting for next week in Hawera to consider an issue of capital notes which would have a right to conversion to shares on maturity. The idea would be to raise $20 million with provision for over-subscription of $10 million. The amount compares with market capitalisation last week of just under $32 million.
Chief executive David Bale said a number of opportunities had been identified.
"Obviously we're not silly enough to specify what they are. But they're in our core business [of] rural services and finance."
In its half-year results last month, Allied recorded a pre-tax operating profit of $1.4 million. Profits of subsidiary Allied Prime Finance ($1.97 million) and rural services ($641,000) were dragged down by losses from the Allied Pine subsidiary, which has been hit by high US$ prices for logs and relatively soft demand for milled timber.
Bale stressed cash raised was due to go to finance and rural services opportunities but noted: "Certainly finance is now a very important arm in Allied Farmers." Allied Prime was bought last June. Twenty per cent of Allied lending is to the rural sector.
Financing has also become increasingly important for the merged PGG Wrightson business, with last week's results showing the loan book grew $38 million or 12 per cent in the half-year to December, with financial services earnings before interest, tax and amortisation ahead 7.5 per cent or $600,000.
