21 Sep 2009

Fonterra uncertain of farmer interest in share deal

7:00 am on 21 September 2009

Fonterra says it does not know how much farmers are likely to invest in extra shares in the co-op.

But it's expecting plenty to take up the offer if farmers support the proposal to allow shareholders to buy up to 20% more shares than what they need to match their milk supply.

The co-operative is proposing the share arrangement to provide more money for development and reduce the redemption risk from having large amounts of money flowing in and out of its balance sheet each year as milk production fluctuates.

It's proposing, in the longer term, that farmers will be able to trade the shares among themselves.

Shareholders Council chair Blue Read estimates that at least half of the farmers could be in a financial position to buy more shares.

He says about 10% of farmers would have no chance of taking up the offer, and another 20% -30% would find it very difficult.

But Mr Read says many farmers have strong balance sheets and are very enthusiastic about Fonterra's success.

Fonterra's chair, Sir Henry van der Heyden, says it's had strong feedback from farmers who want the opportunity to invest more in the co-operative.

Fonterra will start consulting with farmer shareholders at meetings around the country over the next fortnight and throughout October, with the aim of taking a vote at the annual meeting in November.

Fonterra commended

Meanwhile, Christchurch based independent business consultant Alan Robb says Fonterra needs to be commended for its plans to strengthen the capital structure of the organisation.

Mr Robb, who has experience working with co-operatives, says the first step of giving farmers the chance to invest more capital in the business, was inevitable after their rejection of a share market float.

He says he believes farmers will support Fonterra.

But Mr Robb says he's worried that it will be valued on expected earnings and capped so it can't go up.

He says that method is flawed because farmers would be able to take out of the business more assets than are represented by their shares.

Mr Robb says the share value should be set each year based on the value of the assets in the business.

He says one of the big questions is what sort of dividend Fonterra will pay farmers on shares that aren't related to milk supply.