Fonterra’s bonus share issue, flexi contracts ease pressure on farmers facing drought

Fonterra hief executive Theo Spierings

Fonterra farmers will get some breathing space in being fully "shared up" after the world's biggest dairy exporter announced a bonus issue of stock and offered more flexibility for those growing milk production.

Fonterra shares, which trade on a closed market managed by the NZX, last sold at $7.17, or about 59 percent higher than the $4.52 fair value price they had before the Fonterra Shareholders' Fund units they are tied began trading on November 30.

Farmers have to hold the shares in proportion to their production, which can be a financial burden for those fresh to the co-operative or increasing output. They are feeling the squeeze even more at present, with drought declared in Northland and dry weather elsewhere pushing up feed costs.

"The bonus share issue will ease pressure on farmers, some of whom have struggled to stay in the co-op due to the requirements to meet the share standard, particularly given the tough conditions many suppliers are facing at the moment," says Ian Brown, chairman of the Fonterra Shareholders' Council.

The bonus issue of one share or unit for every 40 held on April 12 will increase total shares on issue by 2.5 percent. Chief executive Theo Spierings says it means that an estimated 95 percent of farmers will not need to "share up" to grow their milk production this year.

Fonterra will also make it easier for farmers by offering modified growth contracts, giving them more time and options to buy shares to match production.

A new flexi contract linked to the company's Farmgate Milk Price would require farmers to buy 50 percent of the shares upfront for growth milk, with the remainder having to be purchased only when the price "was above a certain threshold".

The threshold would be set periodically, but is currently $6 per kilogram of milk solids.

Fonterra would also offer a "modified growth contract" allowing farmers to purchase a minimum 10 percent of shares upfront for growth milk with no further purchases required until the fourth season.

The company also flagged its intention to allow a further supply offer for shareholders to sell the economic rights of some of their shares into the Fonterra Shareholders' Fund once its interim results have been published.

Fonterra today held its forecast Farmgate payment unchanged on expectations of higher global prices in the second half of the season.

Farmers are expected to be paid $5.50 per kilogram of milk solids, with forecast earnings per share unchanged at between 40 cents and 50 cents.


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Well, isn't this kind of Fonterra's farmers to gift earnings to the central bank of Australia who hold 7% of the fund. 100 years of farmer contributions to an integrated supply to market chain and we hock some of it off for free. Why? Because the new capital structure has us losing access to new milk supply. And if this thinly veiled attempt to drop the share price by dilution doesn't work, how many more times will we 'issue units'? Ask the US how effective their quantitative easing strategy was. There is only one pie here and trying to force farmers to release their economic rights by increasing the dry share pool is, of course, the tool to push the fund size up. Unless Fonterra is going to buy the rights off the farmers now for $7 after they hocked them off at a discount only 3 months ago. What a debacle. How long will farmers allow this board to destroy capital while claiming they have 'created value'. We can kiss goodbye to the farmer owned co-operative if we see regular share issues. The leak of farm earnings offshore will just become a steady stream until the investor voice that milk price is too high becomes too loud to ignore. And the winners are the foreign banks. Hope John Key sees the folly in his determination to work with Van Der heyden on "developing New Zealand's capital markets".

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Beware of the Greeks bearing gifts.
So Fonterra suppliers are "gifted" 1;40 of their shareholding in conjunction with another Supply Offer tempting members to "free up cash".
A further 2.5% of the Co-Operative effectively de-mutualised and massaged across to outside investors by stealth and deception.
The utopian dream of Fonterra Directors,the privatisation of our Co-Op,is happening apace.

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