Share-trading scheme 'yet to be bettered'

Fonterra's capital restructure plan will keep farmer control of the co-operative. Photo / Sarah Ivey

Dairy farmers are relaxed about proposals from Fonterra for farmer share trading under a concept which has yet to be bettered, says Federated Farmers.

Co-operative Fonterra this week released details of a scheme to introduce share trading among farmers.

Farmers currently have to buy and sell shares from Fonterra based on their level of production, which can force money out of the business if production is dramatically affected by, for example, a drought.

In 2008, the impact of a drought shrank the co-operative's funds by $600 million.

The first two steps in the capital re-structure were approved in November, allowing farmers to buy so-called dry shares beyond those required by their production, and changed the way shares were valued. Dry shares are shares without voting rights.

Chairman Sir Henry van der Heyden said the objectives were to eliminate redemption risk, get a stable balance sheet, protect the co-operative and provide money for investment.

Federated Farmers Dairy chairman Lachlan McKenzie said the majority of farmers were relaxed about the concept because only farmers who supplied Fonterra would trade shares.

Voting rights had not changed and would still be related to production, McKenzie said.

"I think if they keep it in simple terms they will [get a positive reaction]."

Fonterra will hold consultation meetings next week and, after gathering feedback and another round of meetings, could hold a special meeting to vote on a proposal in late June or early July.

Farmers would have three years to buy or sell shares to cover changes in their production, rather than having to do so at one price on one day each year.

"Federated Farmers is very impressed by this proposal and looks forward to more detailed discussions on it," McKenzie said. "Nobody's come up with a better one yet."

Laurie Margrain, chairman of Open Country Dairy, which processes more than 800,000 litres of milk a year, complimented Fonterra on the proposal.

"There are some very worthwhile efforts there to make the market more liquid in terms of farmers being able to sell their shares or exit the supply of Fonterra, but we still think on the surface it's likely to result in a very restrictive market," Margrain said.

"We don't think it answers the key issue of competition via the open exit."

Fonterra chairman van der Heyden said share trading would provide more flexibility to farmers, who could buy and sell shares through the year and better manage cash flow.

"The current system penalises loyal shareholders who effectively fund the return of share capital to farmers leaving the co-operative," van der Heyden said.

A previous attempt by Fonterra to change its capital structure launched in 2007 was dropped before the first vote when it became clear farmers would not support a model that included the creation of a listed asset-holding company.

The issues then were that farmers wanted an evolution process, absolute agreement between the board and Shareholders' Council, and that the company be more advanced with a clear mechanism for the milk price, van der Heyden said.

"Plus the other one - very, very clear 100 per cent farmer controlled and ownership," he said. "I think we can tick those four boxes so we're relatively confident."

CAPITAL CHANGE
* Aim is to remove the redemption risk of Fonterra having to pay farmers when they cash in shares.
* Farmers will trade shares among themselves rather than with Fonterra.
* Farmers can buy up to twice the shares required by their production.
* Target cap on "dry shares" will be 20 per cent of the total shares issued, with provision for an additional 5 per cent.
* A Fonterra Shareholders Fund will help farmers free-up cash by paying them for the right to dividends and the gain or loss in share value.
* The fund will raise money by selling investment units to investors, including the public, who will not own shares or voting rights.
* Fonterra will stay entirely owned and controlled by farmers.
* Farmer share trading would start in June 2011 at the earliest.