Seeking share trading flexibility
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.