Open Country Cheese is warning legislative changes favouring its rival could reduce competition in New Zealand’s dairy industry.
Chairman Laurie Margrain warned that dairy giant Fonterra’s planned stage three of its capital restructuring process could lock farmers into the co-operative.
It is widely thought that changes to the Dairy Industry Restructuring Act would be required, depending on the details of the plans.
The stage three proposal creates share trading among farmers. The first two stages allowed farmers to increase their shareholding to 120% of milk production and created a share price that reflected that limited market.
Mr Margrain said dairy farmers should regard their right to join and leave Fonterra as non-negotiable.
In a statement today, Mr Margain said if Fonterra was no longer required to accept supply when requested or to redeem the shares of those who wish to exit, then farmers will become economically locked in to the co-operative.
Currently, farmers can redeem their shares at the current fair value price, set by an independent assessor.
If farmers agree to the principle of Fonterra’s stage three restructuring plan, the company would no longer have to buy the shares back leaving it to the limited market created by the company’s 10,500 dairy farmer owners.
Mr Margrain said that any proposal to introduce trading among farmers would reduce the share price and limit the ability of farmers to get an economic return for their shares if they wished to sell.
However, Fonterra had already provided a model to farmers that would artificially hold the current fair value share price at today’s value until the limited market value caught up – unless the fair value share would reduce due to market conditions anyway.
The current fair value share price is $5.10 while the mid-point valuation in a restricted market is $3.83.
“The effect on competition in the industry would be disastrous,” he said.
Mr Margrain said he was concerned about an apparent willingness by the Government to support Fonterra’s stage three.
He added that while the company was supportive of Fonterra and recognised its importance to the New Zealand economy, this should not be allowed to result in protection through legislation.
The Government had already indicated it was prepared to change the law to support Fonterra’s capital structure goals.
Open Country Cheese is New Zealand’s second biggest dairy company. Meat processor Affco has a 35% stake in the company, Singapore-based Olam International follows with nearly 25% and Talley’s with 17%.
In January it was revealed about a third of Fonterra’s suppliers opted to buy nearly $271 million worth of new shares in the company.
It was not clear how much of this related to increased production and what was buying above production – dry shares.
Fonterra’s response to OCC’s claims was expected shortly.
Mon, 22 Feb 2010