Friday, March 29, 2024

Sorting out the ‘share factor’

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The advent of trading among farmers (TAF) has brought with it a new reality in share ownership for Fonterra farmers.
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How and when is it best to trade, what influences the share price and how does the dividend stack up against their investment?

Farm sales in the new TAF era mean both vendors and purchasers also need to consider the “share factor”. Last month some vendors were caught out by the new reality when they realised they didn’t receive the 16c/share final dividend payment they’d been expecting.

In years gone by wash-up milk price payments from the previous season and the dividend attached to shares that were themselves also connected to the last season’s milk supply were all paid to the vendor at the same time.

Under TAF the dividend is paid to the owner of the shares on the record date and if a farm was sold with shares with settlement in June that won’t be the former owner unless some special provision was made in the sale and purchase agreement.

Southland law firm AWS Legal partner Toni Green said she had heard of instances where farm sales had taken place with shares included but no clauses had been included in the sale and purchase agreement to ensure the vendor received the final dividend payment.

“It’s something for farmers to watch,” she said.

“We can deal with it in a conditional agreement under the solicitor’s approval clause but farmers do need to be aware of it now.”

Most of the problems would have occurred with sales negotiated last year or earlier this year when it was more common for shares and land to be negotiated as part of the same deal.

Southern Wide Real Estate director Philip Ryan said in Southland the most recent sales were almost all going through with shares bought and sold separately.

Long-time Waikato valuer Ron Lockwood has noted an increasing number of dairy land transactions being agreed exclusive of Fonterra shares.

He’s seen the land market spin out a separate transaction agreement where farmers essentially become share traders, either to transfer the shares into share units or cashing in on the farmer shareholder market.

“Having said that, there were a number of sales last season where the shares were included in the value of the farm – the parties just agreed on a price, based on a valuation,” he said.

He had been asked on several occasions whether an increase in share value meant an individual’s farm had increased in value with it.

“We do not believe that it does. The farm is still worth the same as before, but the values have just been redistributed from land and buildings to shares when share value goes up, and the other way, should those shares fall in value.”

Lockwood had found there were two schools of thought on Fonterra share valuations; one that the shares were overvalued, and the other that they were worth the value they were at.

“To be honest I have given up trying to guess which is correct, but I do wonder if they are overvalued to some extent.”

He said doing the sums on a 32c/share dividend payout on a $5.50 share delivered a 6% return, indicating that at $7-plus the price was high.

“But most people have worked it out pretty fast when buying a farm,” he said.

“If you are paying ‘x’ for land and buildings with no shares, you are going to allow for the shares you will need on top of that and not pay too much.”

He was anticipating a good level of optimism in the Waikato dairying market this spring, given low interest rates and a historically high payout, all against the backdrop of an idyllic winter-spring period. But he recalls only too well the shock of the $5.60/kg milksolids (MS) payout that followed the record high $7.60/kg MS payout in 2007-08, a year that saw farm values in the Waikato soar 20%.

He was also cautious on the impact any hike in interest rates could have, given the relatively large average debt held by the dairy industry.

In Hawke’s Bay dairy land transactions have evolved with land assets selling separate from shares, and agents are now quoting values with shares completely removed from the numbers.

Bayleys Napier country agent Hadley Brown said with a number of transactions behind them now, agents and buyers were comfortable leaving shares separate.

“Unlike in Canterbury farms here do not have such a choice in terms of supply, it is Fonterra only, really.”

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