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Fonterra urges farmers to free up capital

Wednesday 30th June 2010

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Fonterra urged its farmer/shareholders to approve plans to make its stock tradable among themselves, freeing up capital for new investments.

Farmers are meeting at key locations around the country today to consider the Trading Among Farmers proposal, which would end Fonterra’s obligation to redeem or issue shares tied to production or to pay out those leaving the industry. Redemptions expose the cooperative to potentially hundreds of millions of dollars of risk each year.

“Right now, we can’t put all of your share capital to work to generate the best returns,” chief executive Andrew Ferrier told farmers today.

“With permanent share capital, we can invest with confidence in long-term opportunities that build on our global competitive advantage and maximize the returns for your milk.”

Fonterra’s 10,500 voting shareholders have resisted moves to invite other investors onto its register, holding fast to the cooperative structure in the belief it offers the best protection for their interests. Still, chairman Henry van der Heyden said the capital structure will likely change in the future.

Trading Among Farmers could be in place in little over a year if the plan is approved.

The executives and directors are likely to win support for the changes at today’s meeting. The Fonterra Shareholders’ Council, which represents farmers' interest to the cooperative, has backed the proposal as a way to “decisively address Fonterra’s redemption risk,” said council chairman Blue Read.

In urging a yes vote, Read sought to reassure farmers over their perennial fears – continued farmer control and ownership of Fonterra and confidence in the best possible milk price.

“Milk price is, and will remain, at the core of this cooperative and farmer confidence in milk price is a priority for all,” Read said.

Today’s vote is a “work in progress” for Fonterra in its capital restructuring, he said.

Fonterra faces increased challenges in the global dairy products market, van der Heyden said.

New Zealand’s milk supply won’t keep growing at the same pace forever, with physical limits on land available and increasing rivalry from other processors for pool of milk, he said.

Already, overseas rivals are lobbying against the share trading plan. US Dairy Export Council president Thomas Suber wrote in a letter to Agriculture Minister David Carter and subsequently released to the media, that the proposal could result in dairy products being excluded from the Trans Pacific Partnership free-trade deal.

Among details still to be nailed down in Fonterra’s capital overhaul is how to ensure a liquid market for farmers to transact their shares. Fonterra has proposed the creation of a fund, with units available to outside investors, which would help boost liquidity without ceding ownership control.

Farmers would be able to hold a maximum of 200% of production in dry shares under proposed changes, though total dry shares would be capped at 25% with no one producer allowed to hold dry shares exceeding 5% of total wet and dry shares on issue.

Fonterra needs 75% support from farmers for today’s proposal. Results are expected to be released this afternoon.

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