Proposals to regulate the size of the fund holding tradable Fonterra shares are unnecessary and could risk the success of the dairy cooperative's 'Trading Among Farmers' initiative, says chairman Henry van der Heyden.

Reacting to a Ministry of Agriculture and Forestry proposal that the fund be required to hold shares worth between $500 million and $900 million, van der Heyden says evidence from the New Zealand capital markets shows "listed companies with free floats of between $300 million to $500 million can still meet acceptable levels of price efficiency in their share trading."

At $300 million to $500 million, the fund would represent around 8 per cent of Fonterra's issued capital, with the Fonterra board targeting around 20 per cent over the longer term.

The cooperative's constitution prevents more than 25 per cent of its capital being available for trading in the fund, which allows farmer members of the cooperative to trade non-voting, so-called "dry" or investment shares among themselves.

Members of the public, including financial institutions, will also be able to invest in Fonterra for the first time through non-voting units which, while not Fonterra shares, are expected to be effectively "fungible" with Fonterra shares. That is, they are expected to trade at the same price as Fonterra shares and to perform according to Fonterra's commercial fortunes.

Three possible launch dates are in prospect for Trading Among Farmers - November 1 this year, April 1, 2012, and November 1, 2012 - depending on the progress of legislation, sufficient farmers wishing to trade shares, and institutional investors opting to become "registered volume providers", or market-makers, who will quote buy and sell prices for Fonterra units to help stoke market activity.

"Trading Among Farmers will only be launched if it is supported by all stakeholders," said van der Heyden. "The existence of a sufficiently deep and liquid market for Fonterra shares has to be judged from the success of the launch, and not with a hard and fast number that could turn out to be set too high.

"Any regulatory requirement in relation to the Fund has to contribute to its success, and not detract from it."

Likewise, Fonterra is arguing it should not be exposed to any more disclosure or transparency obligations than are required of listed companies under existing securities law, including the issuing of a full investment prospectus prior to Trading Among Farmers commencing.

The primary stated intention of the initiative is to give farmer members of the Fonterra cooperative the ability to increase or reduce that part of their shareholding that is not determined by the rules that govern the issue of voting shares, which are linked to actual milk production.

Farmers can elect to own so-called "dry" shares to a value 20 per cent above their "wet" shares at present. Under the new proposal will be able to subscribe for dry shares up to 200 per cent of their wet share entitlement.