How is TAF panning out

Trading Among Farmers (TAF) is now under way after a process which felt a bit like christening a ship and launching it down the slipway. I could say "God bless all who sail in her", but I do not want to under-value this huge venture.

This leap into the unknown has been interesting to watch from the sidelines. I have no units or shares, though I wish I had, because I would probably have made a tidy sum.

Fonterra's farmers have much more at stake. They are passionate about their co-operative and have more skin in the game, with activity in the Fonterra Shareholders' Market and the Fund affecting the share price.

So, what has TAF meant for farmers? Those who paid attention in early November, before the launch, took a gamble by buying some shares. Farmers awake enough after the launch to sell the economic rights to these shares as units would have made a tidy profit.

However, dairy farmers are only expected to sporadically dip in to see what is happening.

They are more interested in their cows' performance, as reflected in their yield of milk, which they can check via Fonterra's website.

They have little incentive to log on now, as farmers are unable to transfer new units into the Fund at the moment. Restrictions, such as unit trading windows for farmers, do not allow full equilibrium to be met in both markets.

Federated Farmers is pleased that Fonterra shareholders voted to reduce the cap on the size of the Fund, to limit the amount of shares they can place in the Fund and to limit the number of dry shares, being those held in excess of the amount needed to match their milk supply, they can own.

These restrictions should ensure that farmer shareholders remain in charge of their co-op.

At the moment, farmers are able to buy and sell their wet shares, which match their milk supply, with other farmers on a daily basis in the Fonterra Shareholders' Market. This helps those farmers wanting to enter or exit Fonterra or to balance their production. However, the increase in share price, though expected, is spooking some farmers who think the grass is greener on the other side of the fence, especially if they are new conversions and have the choice of supplying another milk processor.

Farmers who need to increase their shareholding to match production will be happy they have three years to share up and no doubt are hoping the share price drops in this time, down from the current highs.

Farmers and investors are also able to buy and sell the existing units already on the market on a daily basis, but there are no fresh ones in the Fund, which is creating the price differential between the Fund and the Shareholders' Market.

Currently units are more expensive than shares, due to demand and the lack of a totally fluid market. Opening up the Fund for fresh units would correct this and, given that the Fund is still within the cap and most farmers will not have reached their limit, it is unknown why the trading window for farmers has not been re-opened.

All-in-all, this is a very exciting time for farmers and for New Zealand investors in general, with TAF allowing urban New Zealand to make a real investment in the rural sector.