Seek­ing share trad­ing flex­i­bil­ity

Matamata Chronicle - - Rural Delivery -

Cap­i­tal struc­ture changes al­low­ing farm­ers to trade Fon­terra shares among them­selves will en­hance the abil­ity of farm­ers to en­ter or leave the co-op­er­a­tive – a key ob­jec­tive of the Dairy In­dus­try Re­struc­tur­ing Act, Fon­terra said.

In a sub­mis­sion re­spond­ing to the Min­istry of Agri­cul­ture and Forestry dis­cus­sion pa­per on pos­si­ble changes to the act reg­u­la­tory regime, Fon­terra said trad­ing among farm­ers would give farm­ers more choice about when and how they bought or sold Fon­terra shares.

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

A key act pro­vi­sion was that farm­ers must gen­er­ally be able to join or leave the co-op­er­a­tive be­fore each new milk­ing sea­son be­gan.

Presently, 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 leave (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.

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 said trad­ing among farm­ers would mean farm­ers had greater flex­i­bil­ity about their share trad­ing, as they would be able to buy or sell on any work­ing day of the year.

The liq­uid­ity would be as­sured through the role of the Fon­terra Share­hold­ers’ Fund which would is­sue units to non-farmer in­vestors linked to Fon­terra shares that farm­ers placed with the fund. Also, farm­ers join­ing or ex­it­ing Fon­terra would be able to take up to three years to buy or sell their shares.

Fon­terra’s view was that these and other fea­tures meant that trad­ing be­tween farm­ers would en­hance open en­try and exit.

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

The min­istry sug­gested an ini­tial fund of $500 to $900 mil­lion.

Fon­terra’s po­si­tion was that trad­ing among farm­ers would only be launched if sup­ported by all stake­hold­ers.

The ex­is­tence of a suf­fi­ciently deep and liq­uid mar­ket for Fon­terra shares had 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 had to con­trib­ute to its suc­cess and not de­tract from it.

There was ev­i­dence from the New Zealand cap­i­tal mar­kets that listed com­pa­nies with free share floats of $300 to $500m could still meet ac­cept­able lev­els of price ef­fi­ciency in their share trad­ing, Fon­terra said.

Fon­terra also sub­mit­ted that other reg­u­la­tory op­tions sug­gested by the min­istry such as fur­ther reg­u­la­tion of the way Fon­terra de­ter­mines the milk price paid to sup­pli­ers and how trad­ing among farm­ers op­er­ated on a day to day ba­sis, were un­nec­es­sary.

Is­sues of dis­clo­sure and trans­parency were 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 re­alised that for a suc­cess­ful launch of the Share­hold­ers’ Fund and trad­ing among farm­ers , farm­ers and in­vestors would need to have con­fi­dence in the trans­parency and ro­bust­ness of mar­ket trad­ing.

The co-op­er­a­tive be­lieved there was 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 min­istry’s dis­cus­sion pa­per.

‘‘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 the act sup­ports trad­ing among farm­ers and doesn’t get in the way of it be­ing put in place.’’

As pre­vi­ously an­nounced, Fon­terra was work­ing to­ward im­ple­men­ta­tion of trad­ing among farm­ers some time be­tween late 2011 and late 2012.

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