The co-operative’s latest support measure was to bring forward payment of its forecast 20 cents a share final dividend to get the money into farmers’ hands as quickly as possible given the low forecast milk payout.
Last year 76% of farmers took up an interest-free loan which cost the company $390 million.
First NZ Capital said in a research note the flexibility provided by the Fonterra Shareholders’ Fund (FSF) could also be used and would take the onus off Fonterra having to get cash to debt-laden farmers at a time when the business needed funds for its value-add growth strategy.
FSF listed on the NZX in 2012 after Trading Among Farmers (TAF) changed the way farmers bought and sold the co-operative’s shares to remove the redemption risk from the co-op and to free up capital.
The analysts said it would be possible to get $300m to $400m of capital to farmers who needed it from outside investors without much real change being required in the way the actual fund size target was managed.
TAF gave farmers more options including being able to hold on to shares up to three years after selling a farm, buying extra shares over the amount of milk they produced and being able to convert shares to tradable units.
Farmers were required to hold one wet share for each kilogram of milksolids they supplied annually while dry shares were any they held above that share standard requirement.
Farmers could trade dry shares on a farmers-only market and on the FSF which was open to all.
Fonterra units were created when farmers converted some of their dry shares and they could also convert wet shares into vouchers while still holding onto the voting rights and obligation to supply milk.
The FSF fund size of 104m units represented 6.5% of the co-operative’s issued capital held by investors who had an economic interest without voting rights.
That was well within the target range under the Fund Size Risk Management policy of 7% to 12%.
However, the potential fund size, which estimated what it could reach if all the 125m available dry shares were sold to non-farmers, was currently 14.3%, at the upper level of the 7% to 15% target range, and likely to rise further as milk production falls.
Federated Farmers dairy chairman Andrew Hoggard said given how low the fund actually was as a percentage of total capital, selling wet shares was “an option worth debating”.
He said TAF hadn’t worked as well as he had thought it would when first mooted with more restriction on the free trading of wet shares than he expected.
First NZ said the structure was set up to give farmers a chance to sell wet shares but at the discretion of the co-operative’s board.
That had been done only once, in a farmer-only buyback following FSF’s IPO in 2012. In return for the sale of the wet shares, farmers received 53 million vouchers held to meet the share standard requirement.
First NZ said it was time for the Fund Risk Size Management Policy to be reconsidered because the limits stymied allowing farmers to sell wet shares and the dry share proportion was already above target range.
“While we’re presenting a case where it might suit FSF and its farmers to facilitate an exchange of wet shares for vouchers, the Fund Risk Management Policy as it currently stands is an issue that would impact Fonterra’s ability to raise external equity, which is not ideal either,” the analysts said.
They suggested two ways to allow farmers to sell wet shares to outside investors; one through a dual bookbuild where investors bid for the shares farmers offered within a set price range or simply opening a window during which farmers could sell them though that would be difficult with the existing fund size policy.
The units were recently down 0.2% to $5.90 and had decreased 1.3% so far this year.
Council says no to plan
UNSTABLE: Tinkering with the limits on the Fonterra Shareholders Fund would put it on a slippery slope, Fonterra Shareholders’ Council chairman Duncan Coull says.
A proposal to let farmers sell the wet shares they have to hold based on their milk production has been rejected by the Fonterra Shareholders’ Council.
Investment broker First NZ Capital suggested selling those shares could support farmers during the low milk payout.
Selling wet shares would endanger the limits on the amount of ownership held by outside investors, Shareholders’ Council chairman Duncan Coull said.
The Fonterra Shareholders Fund size of 104 million units represented 6.5% of the co-operative’s issued capital held by investors, of which 12% were farmers.
That was well within the target range under the fund size risk management policy of 7-12%.
However, the potential fund size, which estimated what it could reach if all the 125m available dry shares were sold to non-farmers, was now 14.3%.
Coull said that meant there was no headroom to sell more wet shares now.
“One of the preconditions of TAF shareholders had was around ownership control and one of those comforts was around fund size and having some limits in place,” he said.
“Once you start shifting those limits you end up on a slippery slope.”
Coull said the fund's target limits are already at risk of being triggered as milk production fell next season.
There were three steps once that happened, depending on the level of the breach.
Things started to get serious if the fund size went over the ultimate 20% limit, at which point the Fonterra board had to suspend the ability for further economic rights to be sold to the fund, unless there was a compelling reason not to do so, and a special shareholders meeting had to be held presenting options to deal with the issue.
The council was guided by farmers and most did not want to see the fund’s limits grow to a size where Fonterra couldn’t afford to buy back the fund units if required in future, Coull said.
But he admitted some farmers would like to have more liquidity in their business.
