Fonterra's farmer shareholders have given a green light for a vote by the cooperative's 10,000 members on whether to allow trading of shares between farmers.
"The trading among farmers proposal provides a unique opportunity to move the co-operative and New Zealand dairying forward," Fonterra Shareholders' Council chairman Blue Read said today.
Share trading among farmers would shift the redemption risk from the cooperative back to the individual farmer -- at present farmers can rely on the cooperative buying back their shares.
Farmers have already approved two initial steps which allowed them to own more shares than required by their production and changed the way shares were valued to recognise the market was restricted to the cooperative's farmer owners.
The first steps received nearly 90 percent support from farmers in November.
Now the third step of the capital restructure will need 75 percent approval of constitutional change from shareholders voting at a special meeting on June 30.
Fonterra has proposed that in addition to farmers trading shares among themselves -- rather than simply selling shares back to the cooperative -- there should be investment units sold to the public and linked to dividends and capital gains on the shares.
Scope to invest in Fonterra dividend streams could also suit retiring farmers and sharemilkers, who supply Fonterra but at present rely on the shareholding of the land-owning farmer for their access to dividends.
A "shareholders fund" could be set up to buy the right to receive future dividends and share price gains from farmers wanting extra cash. The fund would raise finance by selling units to the public -- which would also improve the liquidity of the market for farmers' shares -- but ownership of the company would remain with farmers supplying milk and holding shares linked to that milk.
Currently they have to sell their shares back to Fonterra at the end of the season if they stop supplying milk or reduce their supply -- meaning Fonterra has to hold a reserve of cash in case a large number of farmers cash in their shares at once.
This "redemption risk" could be a problem if a rival company started paying high prices for milk to recruit Fonterra suppliers: not only would the company lose access to the milk, but it would have to cash out the departing shareholders.
Mr Read said share trading among farmers would eliminate the redemption risk and traded shares would also provide Fonterra with a permanent capital base, he said.
"Farmers should expect Fonterra to be better positioned to deliver improved results if redemption risk is eliminated," Mr Read said.
He said the proposed arrangement could give farmers greater financial flexibility.
Farmer confidence in the milk price had been crucial to the council's consideration of the proposal, and the establishment of a "milk price panel" and performance monitoring by the council should provide the necessary level of comfort, Mr Read said.
Shareholding caps would adequately safeguard the interests of shareholders.
Finer details to be worked through included governance of the proposed Fonterra unit fund -- which will allow both farmers and outside investors to trade in rights to dividend streams -- and the rules around the share market.
Details of the proposal will be sent to shareholders on June 11.
Investment banks Goldman Sachs and Craigs Investment Partners have been tipped as "market-makers" for the Fonterra shares, if farmers approve the next stage, the Waikato Times reported. Craigs is half-owned by Deutsche Bank.
For the share trading to always have someone available to buy or sell, the scheme involves one or two financial institutions being appointed as "registered volume providers" offering liquidity in the market.
If the system follows similar models overseas, those institutions would be contracted as agents of Fonterra and required to maintain specific spreads on buy and sell prices, and take on the risk of holding stock until buyers can be found.