The FSF opening price of $5.50 on November 30 has since risen 32% to a high of $7.29 and nearly 60 million units have been traded in nearly 5000 transactions.
Since Trading Among Farmers (TAF) was launched about $300,000 has been added to the share capital of the average Fonterra supplying farm.
That increases the temptation to redeem all or part of that capital to apply elsewhere in the farming business, where it would earn a better return and perhaps supply a Fonterra competitor.
Also, milk production increases averaging 5% nationwide in the season to date mean Fonterra farmers will eventually have to “share-up” (purchase new shares to match increased production) at the much higher market prices.
This will be especially important for recent conversions with expanding milk production in regions like Canterbury, which is 11% up on last season.
The new three-year rolling average share standard will, however, moderate the compliance cost for established farmers who most-recently increased their share holdings by 10% or more at $4.52/share, following the 2011-12 record milk season.
The high turnover of units, totalling two-thirds of the issue volume in fewer than 30 trading days since launch, shows the depth of investor interest in New Zealand dairying and in Fonterra in particular.
However, it also means the market tail is wagging vigorously, feeding farmers’ concerns over possible effects on the dog.
Is a well-informed market sure that higher world dairy prices are in prospect or is an investment bubble growing?
Will the high unit and share prices reinforce dairy farm values through demand from expanding farming families, corporate farmers and syndicates?
On the other hand, Fonterra’s forecast dividend of 32c reduces in yield as the unit and share prices climb, for farmer-shareholders and unit investors.
TAF critic Lindsay Blake told the Fonterra annual meeting in December she was concerned about the high share price.
It would have an impact on milk supply decisions and possibly deter farmers from joining Fonterra because of the share capital requirement, she said.
Outgoing chairman Sir Henry van der Heyden said six months of unit trading, not just one month, would give a better indication of the true share value.
“For the first time we have a fully transparent milk price and unit/share values,” he said.
“TAF has introduced a lot of flexibility for the farmers – firstly the three-year rolling average share standard and secondly the three-year share-up option for new suppliers.
“Perhaps the outside world values this co-operative more than you and I as owners?
“It turns me inside out when farmers say ‘the share price is too high, I’m going somewhere else’ but they say they believe in co-operatives.”
Chief executive Theo Spierings added that a decline in home milk volume was a no-go area and would have to be addressed if the high share price was discouraging suppliers.
The impact of the high unit and share prices on Fonterra farmer intentions is as-yet untested because all suppliers are deemed fully shared until the end of the current season.
They will receive an update on milk production and share standing about March, following the interim financial report, after which more might choose to enter the share market.
Only 160,000 shares, in 54 transactions, have traded since TAF began, which means minor adjustments, not whole-farm sales.
The average unit transaction has been four times the size of the average share transaction.
MyFarm syndicate manager Andrew Watters believes the investor interest in FSF units will flow on to farm investing, to obtain the bigger benefits from rising dairy commodity prices in comparison to the share/unit dividends.
Disclosure: Hugh Stringleman is a Fonterra unit holder.
