Fonterra proposes share trading only among farmers

Wednesday 7th April 2010

Fonterra’s farmer-only shareholders will be able to trade shares among themselves, or via a new shareholders market, in plans announced today by the world’s largest dairy products exporter.

The ‘Trading Among Farmers’ proposal is intended to provide a more stable and substantial capital base for Fonterra’s worldwide development, and is a move on from farmers redeeming or purchasing their shares, equivalent to a farm’s milk solids production, through the cooperative.

Today’s Sky Television announcement and introduction of the proposed scheme will be followed up by a nationwide series of meetings and feedback before a final June decision and recommendation by Fonterra’s board of directors.

“Trading Among Farmers would stop money washing in and out of Fonterra and provide the cooperative with a stable capital base, which means this money could be used to obtain better returns for you,” chairman Henry van der Heyden told shareholders. “It would ensure that we stay 100% farmer controlled and owned and that loyal shareholders would not be penalised by money washing out that they effectively have to fund. Trading among farmers gets rid of redemption risk once and for all, which makes every farmer’s investment in Fonterra more secure.”

This Trading Among Farmers proposal follows an aborted 2007 proposition to allow public trading of Fonterra’s shares.

“The lesson learned from the 2007 capital structure proposal was that the most important principle driving change is the need to retain Fonterra as a cooperative that is 100% farmer controlled and owned,” van der Heyden said. “Trading Among Farmers would achieve just that and is designed to be a lasting solution.”

He said Fonterra looked at other capital structures from around the world, but that the proposal has been developed specifically for the coop’s unique circumstances.

Under the proposal, farmers would still be required to hold ‘wet’ shares to the equivalent volume of milk solids. They could also hold ‘dry’ shares, up to 100% of the number of their ‘wet’ shares. Both types of shares would be able to be bought and sold among farmers directly, or via a Fonterra Shareholders Market.

A Fonterra Shareholders Fund would also be established, which could hold farmers’ shares on their behalf, and pay out money for shares or help purchase shares if required. Such a fund is designed to help farmers stay in the co-op through the various ages and stages of farming life.

The removal of redemption risk is a major factor noted in the need for a capital restructuring.

“Our current capital structure may not work as well in the future if we encounter a period where there is more money going out of the cooperative via redemptions than coming in from growth milk, conversions or dry share issues,” the proposal said. “There is every chance that there will be an incident beyond our control in the future. Consider for instance, what might happen if one or more strongly-capitalised corporate competitors (probably from an offshore market that desires a stronger dairy supply) enter New Zealand and compete aggressively for milk supply. No matter how well Fonterra is performing, they would pay over the odds for milk to get a foothold, even when it is not sustainable.”

The proposal said it makes sense to protect farmers’ stake in Fonterra and to deal with redemption risk now when the coop is in a good position with a solid balance sheet.

“It would be extremely difficult and risky to undergo an orderly process of capital structure change if we were facing rapid, large-scale redemptions, placing the cooperative under significant financial stress,” the proposal said.

Fonterra said Trading Among Farmers would mean its shares are permanent share capital, without the need to hold some back in case it is needed to pay out redemptions.

Businesswire.co.nz

Comments from our readers

No comments yet