State-owned farmer Landcorp to use new fund to raise capital buffer "from time to time"; Also, CEO Chris Kelly's personal view on TAF vote

By Alex Tarrant

State-owned farmer Landcorp is likely to sell shares into Fonterra's newly created shareholders' fund periodically as a way of accessing capital, its chief executive says.

Fonterra also needed to carefully decide how it responded to a failed vote to restrict the size of a fund outside investors could effectively buy Fonterra shares from by purchasing units in the fund, and should not go ahead with proposed changes to its structure until it received such a mandate, Landcorp CEO Chris Kelly told interest.co.nz.

On Monday, Fonterra received votes representing two-thirds of its milk supply in favour of implementing the Trading Among Farmers (TAF) scheme, which will allow for the creation of a fund - the Fonterra Shareholders' Fund - into which Fonterra's farmer-shareholders will be able to sell up to 25% of their shares.

Outside investors would be allowed to buy and sell units in that fund and receive the dividend stream from the shares sold into it. Farmers would still keep the voting rights tied to the shares they sold to the fund.

However, another vote to reduce the potential maximum size of the shareholders' fund from 25% of Fonterra voting shares down to 20% did not receive the 75% approval needed to go ahead. Despite that vote, Fonterra chairman Henry van der Heyden said on Monday that the board would go ahead with TAF as planned, and seek another mandate for the change at its AGM in November.

Fonterra argued the fund should be created so it could better manage 'redemption risk' - the possibility a large amount of farmers would leave at any one time by selling their shares back to the co-op, which was obligated to pay them out.

The TAF scheme was met with resistance from some Fonterra suppliers, who argued allowing outside investors to buy shares would mean the end of 100% farmer ownership of the co-op.

Concern was also raised that outside investors would bid up Fonterra's share price - a barrier to farmers wishing to buy into the co-op, or those needing to buy more shares as production rose - and high dividend payments, at the expense of the milk price Fonterra paid to farmers.

Fonterra would also not disclose the actual numbers of individual shareholders who voted for and against TAF - it measured the vote in terms of milksolids supplied, which critics say meant a small number of large suppliers had more influence over the outcome.

'We'll use the fund'

The CEO of one of Fonterra's biggest suppliers, Chris Kelly of Landcorp, told interest.co.nz at Federated Farmers' AGM in Auckland on Wednesday that he could not say which way the State-owned farming company voted.

Kelly said Landcorp's initial approach to Fonterra's new model would be to "sit on our heels for a wee while, and see if it works in terms of the economic viability."

"If it does go as expected, then yes, we will use some of our shares from time-to-time to put into the fund to generate more capital, and then we might cash them up again. So we'll just use them as a bit of a buffer," Kelly said.

"But look, we have to establish the fund first, we have to make sure it's liquid enough, and we've got to sort out this real challenge between, on the one hand the share-farmers and the owners of Fonterra wanting a maximum milk price and a minimum dividend, versus the investors [in the shareholders' fund], who want the exact opposite," he said.

To quell concerns it was favouring dividend payments over its milk price, Fonterra needed to be as transparent in its milk pricing methodology as possible, which it had done "reasonably successfully."

"But at the end of the day there will always be pressure on them to try and keep both camps happy - one wanting a higher milk price, the other wanting a lower milk price. I think the answer will be, just keep up transparency, which I know is hard for Fonterra because they didn't want to...it's been through the Commerce Commission and they're happy with the methodology that's being used," Kelly said.

"But of course, the cynic in me would say, yeah, but they need the inputs for that methodology from Fonterra," he said.

While that would be a challenge for Fonterra, the co-op was up to it.

Meanwhile, Kelly said Fonterra's board needed to be careful about how it responded to not getting the required 75% vote to change the restrictions around the shareholders' fund. He thought the board needed to get that before going ahead with TAF.

"They're going to put it to the AGM. And I think, and this is my personal view..., if they go ahead without getting the required 75% vote on those caps, I think it will be courting trouble, frankly. Because that's the one thing that farmers are really worried about," Kelly said.

"My personal view is that, I would have thought they'd be reluctant to go ahead with TAF without those changes to the constitution," he said.

"It's all about trying to protect that 100% ownership, which of course farmers are passionate about."

(Updates by including outside investors would buy units in the new fund)