Share trading scheme ‘threat to Fonterra’

[Fonterra] needs to take a global perspective with manufacturing and assets, and building milk pools in the right locations.

Fonterra’s novel share-trading system is putting the co-op at risk, farmer Trevor Hamilton says.

The owner of 10 farms, which produce 10 million kilograms of milk, said he ‘‘firmly believed’’ Fonterra’s Trading Among Farmers (TAF) share system was dangerous for farmers’ joint ownership of the business.

TAF is the mechanism which farmers buy and sell shares linked to their milk production.

When a Fonterra shareholder wants to supply the co-op with more milk, they buy more shares on the company’s private Shareholders Market.

But at times like now, when the industry is doing it tough, farmers are liable to sell their shares to release cash.

Fonterra has cited flexibility as a benefit of TAF, not just in tight payout conditions but when a farmer might have paid for milk shares but then struggles to produce a matching amount of milk, in a drought, for instance. At that point a supplier might want to quick-sell their surplus production-related shares for cash.

Under TAF, non-farmers can buy and sell a linked share on the New Zealand stock exchange through the Fonterra Shareholders’ Fund.

This provides anyone a potential return on co-op shares without giving the investor ownership rights in the co-op.

Hamilton said he made the most of TAF when the co-op turned his old ‘‘nominal’’ productionbased shares into a tradeable asset through TAF.

The value of TAF shares peaked after debut in late 2012 at $7.

Hamilton’s shares, which had previously been worth $12 million, ballooned in value to $20m.

He had used the $8m gain to buy more farms, and spread his dairy supply among other processors, Westland Milk Products and Synlait Milk. His company, THE, had bought three farms in the past two years as part of a diversification strategy.

THE owns three farms in the Rotorua area and one in Hawke’s Bay, supplying Fonterra. In Canterbury THE will soon have five farms supplying either Synlait and Westland Milk.

Investors in Fonterra’s shares have sold down their value since Hamilton took his windfall. The shares were priced at more than $6 in late March, before Fonterra posted a self-declared disappointing interim financial result.

They were worth $4.77 at noon yesterday, a day after milk prices fell again on Fonterra’s Global Dairy Trade auction platform.

Hamilton has spoken out before on TAF and did so again last week. He saw himself as a Fonterra supporter, but said Fonterra needed to provide a better milk payment than it was at the moment.

He saidTHE had done a couple of slash-and-burn budgets in the past six months as Fonterra steadily reduced its payout forecast for the financial year – down to $4.40kg milksolids at the latest revision.

The co-op was not providing THE with the dividend it needed to justify farmers paying for TAF shares to supply the business.

It seemed Fonterra was intent on ‘‘chasing global milk’’ rather than returning a better dividend to farmer shareholders, he said.

Hamilton said he was also worried by the co-op’s recent announcement that independent director Sir Ralph Norris would be leaving the company. It suggested Fonterra was ‘‘under the pump’’, he said.

Fonterra chief financial officer, Lukas Paravicini, said the co-op knew this was a tough season for its suppliers.

It was not the first time the cooperative had faced tough times. and it would will not be the last, he said.

‘‘We have always stuck together and come out the other side stronger. We have the right business strategy and the long-term fundamentals of international dairy demand are strong.’’

In response to criticism about Fonterra chasing global milk, Paravicini said the company was in a ‘‘competitive market for milk and needs to take a global perspective with manufacturing and assets, and building milk pools in the right locations’’.

To have ‘‘global relevance’’, the company complemented New Zealand milk with supply from key strategic markets. Using those milk pools reduced the complexity of supply chains.

Fonterra chairman John Wilson was not available for comment.

Lukas Paravicini Fonterra chief financial officer