Fonterra to propose farmers trade shares between themselves

Fonterra has announced it will propose to farmers they consider creating a system for trading Fonterra shares between each other as part of a third and final step of dairy cooperative's capital restructure started last year. This removes any chance that outside non-farmer shareholders could buy a stake in Fonterra. Fonterra said it would begin consulting on the proposal from April 7 with the potential for a binding vote requiring 75% support at a later date. "The approach of Trading Among Farmers would involve farmers buying or selling Fonterra shares among themselves, instead of purchasing or redeeming them through the Co-operative. It would ensure Fonterra remained 100 per cent farmer controlled and owned," Fonterra said. “It would get rid of redemption risk once and for all, protecting the Co-operative and ensuring it was better placed to grow farmer shareholders’ investment in Fonterra. It would stop money washing in and out of Fonterra and provide the Co-operative with a stable base of permanent share capital, which would give certainty about the level of capital, regardless of any changes in milk production in any season," Chairman Henry van der Heyden said. “In addition, we need to stop redemption risk penalising loyal Fonterra shareholders, who effectively have to fund the return of share capital to farmers who choose to leave the Co-operative,” van der Heyden said. “Trading Among Farmers is also about more flexibility for our farmer shareholders. Among other things we need to find ways to make being part of the Co-operative more accessible – for new farmers wanting to join and for existing shareholders under pressure to sell shares to free up cash,” he said. Here's more of the detail from the Fonterra statement:

The first two steps of capital structure change received almost 90 per cent support from farmer shareholders voting at the Annual Meeting in November 2009. Step One, ‘Strengthening the Share Structure’, gave farmers greater flexibility in the number of shares they can own, up to 120 per cent of their current or expected production. As a financial incentive for farmers to hold a buffer of “dry” shares in excess of production, Fonterra pays a competitive Milk Price and now distributes any profits (after retentions) as a dividend based on shares held, rather than milksolids produced. Step Two, ‘Restricted Share Value’, involved changing the way Fonterra shares are valued to recognise the market is restricted to Fonterra farmer shareholders only. A transitional share price was put in place until the valuation on a restricted market basis catches up. Under the approach being discussed for Step Three, ‘Trading Among Farmers’, the obligation of Fonterra to redeem shares would end and instead, farmers would trade shares among themselves. This would eliminate redemption risk and provide Fonterra with a permanent share capital base - giving certainty about the level of capital, regardless of any changes in milk production in any season.