Fonterra Shareholders' Council rejects "wet shares" sales to help debt-laden farmers

UPDATED: The Fonterra Shareholders’ Council [NZX: FSF] has rejected a suggestion the dairy cooperative could let farmers sell “wet shares” – the shares held based on annual milk production – as a way of providing them support at a time of low milk payout.

Investment house First NZ Capital said in a research note today it would be possible to get between $300 million and $400 million of capital to farmers who need it from non-farmer investors without much change in the way the Fonterra Shareholders’ Fund's target size is managed.

The cooperative has brought forward payment of its forecast 20 cents per share final dividend to be earlier than usual to get the money into farmers’ hands as quickly as possible given the low forecast milk payout. That followed an interest-free loan scheme offered to farmers last year, which cost the company $390 million when 76 percent of farmers took the offer up.

Selling more wet shares could reduce the onus on Fonterra to get cash to debt-laden farmers at a time when the business needs funds for its value-add growth strategy, First NZ said.

But Duncan Coull, chairman of the Fonterra Shareholders' Council which is the cooperative’s elected watchdog for its farmer shareholders, says it wouldn’t support wet shares being issued because it would endanger the limits on the amount of ownership held by outside investors.

Trading Among Farmers (TAF) was introduced in 2012 to give farmers more options on trading their company shares, including being able to hold on to shares up to three years after selling a farm, buying additional shares over the amount of milk they produce, and being able to convert shares to tradeable units.

Farmers are required to hold one wet share for each kilogram of milk solids they supply annually while dry shares are any they hold over and above that share standard requirement. Farmers can trade dry shares on a farmers-only market and on the FSF, which is open to all. 

Fonterra units are created when farmers convert some of their dry shares and they can also convert wet shares into vouchers while still holding onto the voting rights and obligation to supply milk.

The FSF fund size of 104 million units represents 6.5 percent of the cooperative’s issued capital held by investors, of which 12 percent are farmers. That’s well within the target range under the Fund Size Risk Management policy of 7 to 12 percent.

However, the potential fund size, which estimates what it could reach if all the 125 million available dry shares were sold to non-farmers, is currently 14.3 percent - at the upper level of the 7 to 15 percent target range.

Coull said that meant there was no headroom right now to sell more wet shares.

“One of the preconditions of TAF shareholders had was around ownership control and one of those comforts was around fund size and having some limits in place,” he said. “Once you start shifting those limits you end up on a slippery slope.”

Coull said the fund's target limits are already at risk of being triggered as milk production falls next season. There are three steps once that happens, depending on the level of the breach. Things start to get serious if the fund size goes over the ultimate 20 percent limit, at which point the Fonterra board has to suspend the ability for further economic rights to be sold to the fund, unless there is a compelling reason not to do so, and a special shareholders meeting has to be held presenting options to deal with the issue.

The council was guided by farmers and most don’t want to see the fund’s limits grow to a size where Fonterra couldn’t afford to buy back the fund units if required in future, Coull said. But he admitted some farmers would like to have more liquidity in their business.

Federated Farmers dairy chairman Andrew Hoggard said given how low the fund actually is as a percentage of total capital, selling wet shares was “an option worth debating”.

He said TAF hadn’t worked as well as he had thought it would when first mooted, with more restriction on the free trading of wet shares than he anticipated.

Wet shares are issued at the discretion of the cooperative’s board. That has happened only once in a farmer-only buyback following FSF’s IPO in 2012. In return for the sale of the wet shares, farmers received 53 million vouchers held to meet the share standard requirement.

First NZ said it was time for the Fund Risk Size Management Policy to be reconsidered as the current limits prevent farmers from selling wet shares and the dry share proportion is already above the target range.

The units were recently down 0.2 percent to $5.90 and have decreased 1.3 percent so far this year. 

(BusinessDesk)