'Something for everyone' - Fed Farmers

A big farmer lobby which has previously adopted a sceptical tone on aspects of Fonterra's proposal for share trading says the scheme detailed today "has something for everyone".

"We're backing the draft proposal going out for consultation, we think it's very flexible," said Federated Farmers Dairy chairman Lachlan McKenzie.

Fonterra today suggested 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.

But the 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.

Today the cooperative proposed farmers be allowed to sell shares to other cooperative members and that a "shareholders fund" 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. Similar to the investments offered for the former Dairy Equity company, such units would not have voting rights from the shares.

But farmers would still be paid the same for their milk, they would retain the voting rights and, in law, would be the owners of the shares. They could buy back their entitlement to dividends and any change in the share price at the prevailing market price.

Mr McKenzie said that such an arrangement could suit those farmers who were a bit tight on cash.

"The time frame is very flexible and allows farmers three years to buy or sell their shares," he said.

Loyal, existing Fonterra shareholders would be able to invest more money in "dry" cooperative shares, with the opportunity to buy shares up to twice the value of their actual milk production, though the total number of shares will not rise above 120 percent of the number of kilograms of milksolids produced. In extreme circumstances such as a drought, this could be extended by 5 percentage points.

The 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.

"Federated Farmers is very impressed by this proposal," Mr McKenzie said. Before the announcement, he had warned that Fonterra's proposal would not be successful if farmers perceived it wanted to eventually "float" the co-operative on the stock exchange, as had been suggested in 2007..

The Fonterra Shareholders' Council also welcomed the co-operative's move.

The share scheme, "Trading Among Farmers" would remove the redemption risk, said the council chairman Blue Read.

He said the guiding principles also included keeping co-operative voting linked to share-backed milk supply, creating a stable farmer-only share trading regime, providing a tradeable pool of shares and ensuring there was a robust and transparent milk price.

"We now want shareholders to help shape a final proposal," he said.