The fund and the unit price changes have attracted huge interest and that’s set to continue with the fund to be reported in the NZX50 from this month. Analysts expect that will bring another flurry of activity with some investors having a policy of holding interests across the full NZX50 offering.
By December 14 more than half the units in the fund had already changed hands with some analysts suggesting much of the hype that pushed the price upward had been related to investors jockeying to cement their preferred portfolio holdings. Some who hadn’t received their full allocations had decided to quit completely while others were filling up their quotas.
Buyers may have accepted having to pay a high price because they looked at the average cost of their whole portfolio given they’d gained a portion at the launch price of $5.50/unit.
As a proportion, 20% of their whole portfolio purchased at close to $7 could be acceptable if they’d already secured 80% at $5.50.
One thing is for certain, the trading among farmers (TAF) system of a parallel fund to ensure liquidity for farmers to trade shares in the farmer sharemarket has been all one-sided so far.
The frenzied activity in the fund is in stark contrast to the expected muted trading in the sharemarket with the result the fund is definitely in the driving seat when it comes to farmers’ share price.
By December 14, just two weeks out from launch more than 52.4 million units had traded in the fund at a turnover of more than $353m. By comparison just under 20 trades had taken place in the Fonterra farmers sharemarket involving close to 54,000 shares.
Farmers haven’t had a hand in striking a value on their shares, or at least not yet. Fonterra has said all farmers are fully shared-up and it’s likely that at the end of the season the vast majority will have excess shares for the 2013/14 season based on the fact their share standard will move to a three-year rolling average.
They will also have three years to fully share up and won’t be hit by a 5c/kg milksolids (MS) milk price differential until after June if they find they are under-shared for the 2012/13 season.
Fonterra chief financial officer Jonathan Mason said at TAF’s launch that farmers now don’t have to rush in and make share purchases on a given day at that day’s given price.
“What they have now is the flexibility to choose the times they buy and how many shares they buy. There will be some periods when farmers think the price is good and some times when they think it’s high.
“They can buy at various times throughout the year so they’ll average out their share price themselves,” he said.
Given most existing farmers may not be participating in the sharemarket for some time, the question is will it be the fund that continues to set their share price for a long time yet and just how will investors in the fund behave?
If the dividend ends up at 32-35c, units bought at $7.20 will return just 4.4- 4.9%. But as analysts remind us investors’ average unit price is likely to be much lower than the highs and returns are more likely to be 5.5-5.8% if the average price paid was close to $6/unit.
Property value
For farmers growing supply, considering conversion or land purchases the advent of TAF and hype in the Fonterra shareholders’ fund (FSF) pushing share price up has created unease.
Property Advisory Limited director and registered valuer Paul Mills said the property market had been thinking about the world after the TAF launch for some time and had been anticipating a hike in share price.
While it’s too early to see exactly how the property market will behave in the new world Mills expected there would be variations depending on whether a region has alternate dairy company supply options or not. In areas where a number of supply alternatives exist, the expectation would be farmers will weigh up supply options and land purchasing decisions based on the risk and return profile of the various company supply options.
Land and Fonterra shares have, to a large extent, been unbundled. In regions where there is true competition, meaning deregulation, relative returns for each, inherent within the supply/demand dynamics of the respective markets, will determine the land price, he said.
For land the return is the milk price and for Fonterra shares it’s the dividend.
After TAF there doesn’t seem to be any real gain in trying to consider the value of the land and Fonterra shares as an aggregate value and then seeking to apportion the value to each individually, he said.
“Of course, historically we have seen the value of land and Fonterra shares adjusting simultaneously when they were sold or traded together in the market,” he said.
“The fact of the matter is that they are now traded in different markets with very different supply/demand dynamics.”
In a region like Canterbury, where there’s competition in the mid and southern areas, he suggested land values could find an equilibrium value that reflects the risk/return profiles for the various processing options available, that is their milk prices and risks associated with getting them.
In areas where there’s no competition land values are likely to be determined more simply by yield or return to the business and that could very well include the value of shares.
Supply risk
Fears have been raised that while TAF has dealt with the co-op’s redemption risk it could put the brakes on milk growth and even see existing farmers cash up and head on over to competitors, creating supply risk.
But Fonterra has pointed out farmers selling shares have to do so in the Fonterra farmers’ sharemarket, so have to trade with each other. There are very few takers there when it comes to buyers for shares. Any big move to sell will have the effect of bringing the price down.
Specialist dairy farm accountant Graham Brown said he’d advised clients, particularly those looking to expand, to be patient and let the market settle down. He also cautioned them to think carefully before making any decision to cash up shares to fund further expansions. The interest cost they could save by selling shares should be greater than the dividend they would forgo.
At the moment the dividend that would be forgone would be roughly similar to the interest cost on shares so it may in fact be cash flow neutral, he said.
Farmers needed to do their sums carefully, consider all the implications over what they gain and what they lose and make sure they understand what their supply and cost options are for expansion or conversion.
Dairy consultant Chris Lewis of Baker and Associates said farmers weren’t likely to be big traders but there would be some who saw the high share price as a one-time chance to correct their balance sheet, either selling beneficial rights at the next opportunity or using it as an exit strategy and selling shares.
“Others will be viewing the share price very positively and be saying to their banker – your security level in this business has just improved,” he said.
The likely movement in share price as both the market and the fund settle down over time meant the full value of the share wasn’t likely to be reflected in farmer’s balance sheets, so suggesting farmers had increased their asset value by more than $2-$2.50/share probably wasn’t true.
