The fund had grown to $713 million at the interim balance date January 31 with the economic rights of just under 122m shares.
It grew by $111m between July 31, 2014, and January this year.
At May 5 FSF had 117m units on issue with a market capitalisation of $616.5m, spread around 8500 large and small outside investors who were entitled only to dividends.
At the end of March the Fonterra Shareholders’ Council (FSC), which is required to monitor the fund, reported it was 7.3% of shareholders’ equity, towards the bottom of the 7-12% target range.
The launch of the fund in December 2012, with its Janus faces of economic rights and investment units, raised more than $500m of new equity for Fonterra.
None of the analysts interviewed was concerned about Fonterra’s ability to raise capital, saying its credit rating was excellent and it had a range of what are called treasury options – ways of raising money.
They now included a possible rights issue, where farmers don’t want to buy shares could elect to sell the rights. That would have the effect of growing the size of the FSF under the 12% ceiling.
New share capital was never a large funding source for Fonterra, one season’s inflow sometimes followed by next season’s outflow.
While many farmers might not realise it, their milk payments were now subordinated to Fonterra’s debt repayments, making farmers the lenders of last resort by default.
The credit rating agencies made that point every time they re-rated Fonterra.
“TAF was a very elegant corporate finance solution to the capital problems of the co-operative but it is important to remember it is not the end-point for Fonterra’s structure,” one analyst said.
TAF had provided a mechanism for farmers to release share capital for expansion or because of adverse weather events while removing the so-called financial redemption risk from Fonterra.
“Farmers have taken that option because the FSF has got larger and that has created a downward pressure on the share-unit price,” the analyst said.
UBS head of NZ research Marcus Curley commented on the flexibility now provided to farmers, such as delayed sharing-up and the MyMilk initiative.
“It’s hard to imagine what more the company could do, short of eliminating the share standard.
“Murray Goulburn co-operative in Australia is adopting a similar approach so if TAF wasn’t working Murray Goulburn wouldn’t imitate.”
Curley said the share price history since the initial public offering (IPO) showed the hybrid structure was working.
“I think that addresses the farmer concerns that investors would de-power them and that now farmers and investors want the same things.
“Farmers want their investments in shares to do well rather than just being a requirement to supply milk.”
During the past 18 months, when the FCG share price and the FSF unit price had fallen from a peak to a trough, the FSF had grown in size, which showed farmers had been net sellers.
While many farmers might not realise it, their milk payments were now subordinated to Fonterra’s debt repayments, making farmers the lenders of last resort by default.
Their reasons included drought and flood issues, lower personal requirements for dry shares and perhaps a perceived lack of return on their share capital.
The FSC keeps reporting trading in FCG shares has been strong but the turnover in the much smaller number of FSF units on issue has been twice as large.
For example, during the past 12 months FSF has recorded 18,000 trades and a total turnover of $828m, exceeding the market capitalisation of the fund.
FCG supply shares have recorded 9500 trades and turnover of nearly $400m, about 5% of Fonterra’s total issued capital.
What that disparity meant was not immediately clear to the analysts.
Investors, by their nature, traded more often but the top 20 FSF shareholders list had remained quite stable.
Farmers, by nature of their businesses and co-operative membership, had to hold supply shares.
But over a period during which milk production increased by more than 10%, share trades less than half of that volume would indicate several things.
Among them, that dry shares had been converted to wet, retiring farmers had opted to use their grace periods for selling supply shares and that new conversions and even new farm buyers had made use of Fonterra’s now generous share-up requirements to meet the standard.
The disparity also seemed to be a prima facie case of the investors setting the share price but that was not proved.
“Over time the price is clearly being informed by the marginal buying and selling on both markets,” said one analyst.
“This means that while there may be more activity on one of the two markets, collectively the markets inform the price.
“Note also that farmers are free to choose which market they trade on so they could be trading on the unit market as well.”
As Federated Farmers dairy section chairman Andrew Hoggard observed, Fonterra would have a much larger problem if the share-unit price had remained high while the milk price slumped.
Then farmers would be looking for the exit doors and cashing up their shares to extract value from the co-operative and asking the tankers of other processors to call instead.
