Friday, March 29, 2024

Handsome returns

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Investment in dairy co-operative shares over the past 20 years has brought comparatively handsome returns for Lincoln University farm management lecturer and dairy farmer Marvin Pangborn.
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In a research paper prepared this year, he showed how his investment since 1993 has yielded an internal rate of return (IRR) of 14.4% in nominal terms and 11.7% when adjusted for inflation. The share value at the time of the calculation was $7.90/share.

He’s quick to point out the return figures will vary hugely from farm to farm. Most of the big gains were made during times of restructuring, either through mergers or with the introduction of trading among farmers (TAF). Fonterra’s formation in 2001 brought with it the biggest gain so far. By that point, eight years after first joining the co-op, Marv and Jane’s farming business had invested $123,850 in shares in predecessor co-ops.

At Fonterra’s inception the fair value share for the new mega co-op was initially set at $3/share, boosting the value of their share asset to $510,493.

To the former bankers, that was a great return. It’s one Marv calculates equated to a huge IRR of 57.1% in nominal terms at that time or 54.5% in 2013 dollar terms.

Since then their farming business has invested a lot more heavily in the co-op as it’s also marked a period of fairly rapid production and business growth for them.

And the cost of the co-op’s shares has gone up, and down, too with them paying close to half a million dollars or $499,982 for the right to supply their increasing milk supply since 2001.

More recently they’ve had the right to receive dividends as Fonterra has more clearly defined its milk price as opposed to its profits.

Marv’s paper details the range of vehicles the dairy co-ops he supplied have used over the years right back to the initial bonus issue of revenue reserves by Alpine Dairy Products in 1993. Back then farmers were issued with 20c capital notes in a ratio of one for each kilogram of milkfat and received a portion of the capital reserves as shares at a rate of one 50c share for every kilogram of milkfat.

Over the next four years a series of bonus issues and the conversion of shares and capital notes to a milksolids (MS) basis meant Canterbury farmers eventually held 50c/kg MS shares and two capital notes/kg MS also valued at 50c each.

The merger with Southland Co-operative Dairy Company followed by another merger with New Zealand Dairy Group NZDG and eventually Fonterra’s formation meant farmers’ shares were valued at $3/kg MS.

The capacity adjustment system was also introduced, known as peak rights which were initially valued at 90c/kg MS. In 2006 these were incorporated into the share value.

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