Fonterra and MAF on the same page over the importance of trading among farmers

Capital structure changes that will let farmers trade Fonterra shares among themselves will enhance the ability of farmers to enter or exit the Co-operative – a key objective of the Dairy Industry Restructuring Act (DIRA), Fonterra said today.

In a submission responding to the Ministry of Agriculture and Forestry (MAF) discussion paper[1] on possible changes to the DIRA regulatory regime, Fonterra said ‘Trading Among Farmers’ would give farmers more choice about when and how they buy or sell Fonterra shares.

DIRA was written at the time of Fonterra’s formation in 2001 to promote efficiency in the New Zealand dairy industry.

A key DIRA provision is that farmers must generally be able to join or leave the Co-operative before each new milk season begins.

Currently, the price for Fonterra shares is set under the Co-operative’s constitution based on a value range set by an independent valuer. Fonterra must issue and redeem shares to farmers in accordance with their decision to enter or exit (or as a result of changes in annual milk production).

Under Trading Among Farmers, Fonterra shares will be permanently on issue and farmers wanting to adjust their shareholding up or down will trade with other farmers.

The introduction of permanent share capital will remove “redemption risk” and prevent money from washing in and out of the Co-operative’s balance sheet every season due to fluctuations in farmers’ milk production.

In its submission, Fonterra says Trading Among Farmers will mean farmers have greater flexibility about their share trading, as they will be able to buy or sell on any working day of the year, at prices determined by a fully-informed, deep and liquid market.

The liquidity will be assured through the role of the Fonterra Shareholders’ Fund which will issue units to non-farmer investors linked to Fonterra shares that farmers place with the Fund.

Additionally, farmers joining or exiting Fonterra will be able to take up to three years to buy or sell their shares.

Fonterra’s view is that these and other features mean that Trading Among Farmers will enhance, not weaken, open entry and exit.

Fonterra agrees with MAF that the Fund should be of an appropriate initial size to provide farmers and investors reasonable assurance of a sufficiently deep and liquid market.

In its discussion paper, MAF suggested an initial minimum size for the Fund of $500-$900 million.

Fonterra’s position is that Trading Among Farmers will only be launched if it is supported by all stakeholders – including those who want to invest in the Fund. The existence of a sufficiently deep and liquid market for Fonterra shares has to be judged from the success of the launch, and not with a hard and fast number that could turn out to be set too high. Any regulatory requirement in relation to the Fund has to contribute to its success, and not detract from it.

There is evidence from the New Zealand capital markets that listed companies with free share floats of $300-$500 million can still meet acceptable levels of price efficiency in their share trading, Fonterra says.

Fonterra also submitted that other regulatory options suggested by MAF, such as further regulation of the way Fonterra determines the Milk Price paid to suppliers, and how Trading Among Farmers operates on a day to day basis, were unnecessary.

Issues of disclosure and transparency are already covered through existing standard securities and company laws, as well as the rules that will apply to the two registered exchanges. These would reinforce an already robust governance structure around milk price setting in the form of the Milk Price Panel and other processes.

Fonterra realises that for a successful launch of the Shareholders’ Fund and Trading Among Farmers, farmers and investors will need to have confidence in the transparency and robustness of market trading.

The Co-operative believes there is no need for any specific regulation to achieve this objective, once Trading Among Farmers has been launched successfully.

Fonterra Chairman Sir Henry van der Heyden said Fonterra welcomed the MAF Discussion Paper, which it considered was broadly supportive of Trading Among Farmers.

“We’re pleased MAF has acknowledged the potential benefits of Trading Among Farmers in terms of its potential to improve the efficiency of New Zealand dairy markets,” Sir Henry said.

“We’re generally on the same page in terms of the overall goals and approach, but we think it’s crucial that any change to DIRA supports Trading Among Farmers, and doesn’t get in the way of it being put in place.”

As previously announced, Fonterra is working towards implementation of Trading Among Farmers some time between late 2011 and late 2012, subject to finalisation of detailed design of the trading markets and appropriate legislative changes.

[1]Regulatory Regime to accompany Fonterra Capital Restructuring, MAF Discussion Paper No: 2011/01, February 2011