So far it’s stood up to all of them.
It’s also prevented what could have been big outward and inward flows in capital had Fonterra still been required to buy and sell shares itself given an 8% increase in production in 2013-14 and this season’s likely 5% drop.
At a $5.90 share price this season’s fall in production would have opened up the co-operative to a $478m redemption risk making any kind of co-operative support loans or actions to help farmers unlikely.
Even at the fair value share price that operated before TAF of $4.52/share the redemption risk could have been significant at $366m.
Before TAF’s launch at the end of 2012 fears were expressed that the Fonterra Shareholders’ Fund size could quickly breach limits. Those fears haven’t been realised although this season’s drop in production may again test the potential fund size limit.
The potential fund size is the actual fund size plus the number of dry shares farmers hold.
The previous fall in Fonterra’s milk supply did lead to a spike in dry shares held but the numbers quickly dropped with production increases in 2013-14 and 2014-15 as dry shares reverted back to wet shares again in support of milk production.
Fonterra analysis has shown the shift to a milk production three-year rolling average to determine the number of shares that must be held does have the effect of smoothing out volatility in dry share volumes. The shift to a milk production three year rolling average to determine the number of shares that must be held does have the effect of smoothing out volatility in dry share volumes.
It might also reduce the chances of farmers converting dry shares to fund units and cashing them in at the end of this season to top up flagging incomes as the previous two seasons have been higher production years.
For TAF’s first two years the potential fund size was above the first upper target of 15% of Fonterra’s shares on issue and while it’s still close to it at 14.6% the actual fund size is below the 7-12% limit range at 6.6%.
There are a series of limit targets and as each one is hit certain actions must be taken including meeting with the Fonterra Shareholders’ Council and setting out the actions that will be taken to get numbers back down to acceptable limits.
The fund unit price and farmer share price are tightly linked due to the activities of a market maker.
The two prices have remained within 120 basis points (1 basis point = .01 of 1%).
While the 40% of units are held by institutional investors and the largest single investors are Australian-based JCP Investment Partners and National Australia Bank with 8.5% and 7% respectively, New Zealand dairy farmers hold 10%.
Original analysis predicted farmers would buy units ahead of a planned increase in production so they could convert them to shares but that proved to not be the case.
It was since seen to be not the motivation – they actually just buy them because they see it as a good investment, Fonterra analysis has found.
Farmers have a good understanding of what drives the share price and as soon as the milk price drops their activity in the market increases.
