Fonterra details plans for share trading between farmers (Update 4)

Fonterra has announced more detailed proposals for trading of its shares between farmers, including the prospect of farmers buying more 'dry' shares, plans for a 'registered exchange' providing the platform for trading, plans for one or two big financial institutions to be market-makers, and the creation of a Fonterra Shareholders Fund to help farmers buy and sell shares which would also be open to outside investors. (Updated to include; * details on Shareholders Fund and market-makers, * Fonterra Chairman's comments on redemption risk, * Farmer Council backing, * Timing of vote by early July 2010, trading by mid 2011, * Dividend payout policy confirmed at 65-75% of operating profit) The Shareholders Fund would buy rights to dividends from the shares, but would not hold voting rights. This fund would, however, allow non-farmers to buy into the fund as it will be a unit trust open for investment generally, Fonterra said. This would open up some form of investment in Fonterra to the general public for the first time and raises the prospect of units in the Fonterra fund being traded on the NZX, the holy grail for the New Zealand stock market, which lacks exposure to the key Dairy sector. Fonterra said farmers could buy up to 2 times their annual production in 'dry' shares, which are shares not backed by milk production. But Fonterra said it would cap the total number of 'dry' shares at 20% of the total number of shares. The proposal includes one or two large financial institutions acting as 'registered volume providers' or market makers to offer a 'spread' offering to buy or sell Fonterra shares. Chief Executive Andrew Ferrier said the market makers would not have full ownership rights when holding the shares, but would have access to dividend flows or be exposed to rises or falls in the shares. Fonterra would hold a competitive process for the market makers and control the size of the spread offered. "The shares would be held in the equivalent of trusts," he said. Fonterra has share trade currently between NZ$400 million to NZ$1.1 billion a year, with trading of between NZ$2 million to NZ$5 million daily. Farmers would receive a higher price for share-backed milk compared with unshared milk "to encourage them to back their production with shares as quickly as possible." The proposals need the approval of 75% of farmers and there has yet to be a vote scheduled. Fonterra's shareholders council supports the proposals. Fonterra Chairman Henry van der Heyden said this third step in Fonterra's capital restructure process would remove the 'redemption risk' around Fonterra, where farmer shareholders leaving the industry can force Fonterra to buy back their shares. The first two steps involved farmers buying 'dry shares' to boost Fonterra's capital and restricting the value of Fonterra's shares to NZ$4.52 each. "This would stop redemption risk − money washing in and out of the Co-operative as farmer shareholders purchase or redeem Fonterra shares through the Co-operative at the end of the season," van der Heyden said. “Farmers would be able to buy and sell shares through the year, meaning we could share up to match production and manage our cash flows better,” he said. “We have managed redemption risk reasonably well so far but it may not work as well in the future. “For example, there is the risk of strongly capitalised or subsidised offshore investors entering New Zealand and paying unsustainably high prices for milk to get a foothold. In such an event, Fonterra could face considerable redemptions − putting our balance sheet under potentially significant financial stress," he said. The potential arrival of Chinese investors into New Zealand's dairy industry has sparked debate in recent weeks about foreign ownership of New Zealand's biggest export sector. “And, the reality is that the current system penalises loyal shareholders who effectively fund the return of share capital to farmers leaving the Co-operative,” said van der Heyden. He added that Fonterra had set a dividend payout policy of 65-75% of operating profit, which means capital retention of 25-35% of profit. Here are more details directly from Fonterra's statement below:

* Giving famer shareholders the choice to invest in extra dry shares up to a maximum of 2 times their annual production (2 shares per kgMS from the current 1.2 shares per kgMS.) The Board would target an overall cap on dry shares at 20 per cent of the total number of shares on issue, with provision to extend the cap by 5 per cent in extreme circumstances. * New and current farmers would be able to share up over three years to cover additional production, while exiting and current farmers would have up to three years to sell their Fonterra shares. * Farmers would receive a higher price for share-backed milk compared with unshared milk to encourage them to back their production with shares as quickly as possible. Only shares backed by milksolids would have voting rights. * Farmer shareholders could choose to buy or sell shares among themselves via the Fonterra Shareholders Market. Those farmer shareholders who did not want to go through the process of buying and selling shares would not have to do anything; Fonterra would buy and sell shares for them via the market, at the current market price, to match their production following each season. * A range of mechanisms would be put in place to ensure there was a sufficient volume of shares to buy and sell. One or two substantial financial institutions would be appointed to provide plenty of volume in the market and less fluctuation in price. These “Registered Volume Providers” would buy and sell shares in a similar way that banks buy and sell foreign exchange, with Fonterra setting their charges. * A registered exchange would be contracted to provide the administrative platform behind Fonterra’s farmer-only market. * A new Fonterra Shareholders Fund would help farmers purchase new shares or retain shares they would otherwise have to sell. * The fund would pay farmer shareholders for the right to receive dividends and the gain/loss from any change in value of those shares. This would enable farmer shareholders to free up cash. * However, farmers would still be paid their full share-backed Milk Price, remain the owner of their shares and retain all their voting rights based on share-backed milksolids. * Farmers could buy back their entitlement to dividends and any change in the share price when they wanted to at the prevailing market price. * The Fund would raise the money it needed to pay farmers by selling investment units. * It would target friendly investors such as sharemilkers and retired farmers. Institutions and the public would also be able to participate. Unitholders and the Fund would not have any voting rights in the Co-operative.