Gap between Fonterra stocks continues after burst of activity over possibility of consumer business sale

The price of Fonterra farmer-owned shares surged in market excitement over the possible consumer business sale.

Fresh energy in Fonterra farmers’ poorly-performing share price after the big dairy company’s signal it is considering selling its consumer business may have run out of puff, with a significant gap still between the price and that of listed Fonterra units.

The price of Fonterra Cooperative Group (FCG) shares jumped to $3.12 on the May 16 announcement, after languishing at or below $2.50 for six months, but by Monday had fallen to $2.95.

In contrast, units in the Fonterra Shareholders Fund (FSF) on Monday were at $3.70, a steady price since January.

Only farmers can own shares in the co-operative, New Zealand’s biggest business. The listed dividend-carrying, non-voting units are available to outside investors.

Independent investment bank Northington Partners reported last week, in an analysis of Fonterra’s first-half 2024 financial results for the company’s farmer watchdog council, that one of the consequences of Fonterra’s capital restructure and capped shareholders’ fund in 2023 had been “a poorly-performing” share price in the farmers-only market relative to the price for units.

At the time of writing its report, Northington said the price differential was at “all-time highs” compared with the unit price.

Northington said at the time of writing the then-current restricted market discount of 35 per cent compared with an average of 14 per cent in the period between the announcement of the capital structure review and the restructure’s implementation.

“All else equal, this represents over $200,000 in lost value to an average fully shared-up farmer (the current value of FCG shares vs the value of FSF units and an average farm size of 174,000kg milksolids).”

Northington said it expected much of the recent widening in the discount would be transitory as farmers reweighted their shareholdings for various reasons. But the discount had been exacerbated by the “significant” decrease in market volumes for FCG shares, the analysis said.

Northington noted liquidity in the FSF market had also decreased materially, meaning price discovery in both markets had likely diminished.

“We expect that some level of steady state ‘equilibrium’ in the long-run restricted market discount will eventually be reached as farmers obtain their desired shareholding levels. However, there is still likely to be periods of volatility (increase or decrease in the restricted market discount) caused by a range of external factors (droughts, financial conditions etc).”

Average 12-month daily volumes were less than one-third of the levels in the 2019-2020 dairy season prior to changes in the capital structure and the removal of investors from the market through the capping of the fund, Northington said.

Asked to respond to Northington’s claim of a $200,000 average farmer loss of value, Fonterra in a statement said it had nothing further to add to an earlier response to the Herald on the price gap from chairman Peter McBride.

In that response, McBride noted it was a restricted market in which only farmers could buy and sell to each other. Ultimately it was farmers who would determine the value of the shares, he said. He also noted that a farmer’s cost of capital was normally higher than that of other investors.

Fonterra chairman Peter McBride says farmer-shareholders strongly supported the capital restructure that triggered an expected price gap.

McBride said the company had put a huge amount of time and energy into consulting with our farmers on the changes to capital structure.

“During those conversations we were very clear that a lower share price was a likely consequence of moving to a restricted market. It is clearly noted in the formal proposals – including the Notice of Special Meeting. More than 85 per cent of total farmer votes were in support of the change. The Co-Operative Council (farmer council) was more than 90 per cent in support,” McBride said.

He also noted there had been an impact on the share price following Fonterra’s capital return of $800 million to shareholders following the sale of Chilean business Soprole.

Over time, Fonterra expected the price to reflect the company’s financial performance and the value its 8000 farmer-shareholders saw in that, McBride said.

John Stevenson, chairman of farmer-shareholder watchdog the Fonterra Cooperative Council, which commissioned the Northington report, said that prior to Fonterra’s May 16 announcement about the consumer business, farmers had reported increased cost pressures on-farm, with little spare capital to invest.

“We do note that liquidity has been low during this time as well. Farmers have told us that post the announcement they have had a heightened interest in the FCG share price and what might happen post any divestment, but it is too early for Council to have an informed comment on this.”

Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.