15 Mar 2011

Fonterra says MAF setting shareholders fund too high

2:10 pm on 15 March 2011

Fonterra says the Ministry of Agriculture and Forestry (MAF) is setting the bar too high for its proposed shareholders fund so that it can introduce trading among farmers.

MAF released last month a consultation document on proposed changes to the Dairy Industry Restructuring Act to allow Fonterra to introduce sharetrading.

It has received 23 written submissions on the paper, with mixed response and some calls for the shareholders fund to be set at even higher levels.

In the consultation paper MAF suggests an initial minimum size for the fund of $500 million - $900 million.

Fonterra is calling for a smaller fund of $300 million - $500 million.

The Westland Co-operative Dairy Company says the minimum fund size should be $900 million - $1.8 billion.

The Tatua Dairy Co-operative says the fund should be set at a minimum of $500 million and legislative controls should be put in place to ensure it does not go below that level.

Fonterra's corporate finance and strategy group general manager, Alex Duncan, says the Fund should be of an appropriate initial size to provide farmers and investors with reasonable assurance of a sufficiently deep and liquid market.

But he says there is evidence that listed companies with free share floats of $300 million - $500 million can still meet acceptable levels of price efficiency in their share trading.

Mr Duncan says other regulatory options suggested by MAF, such as further regulation of the way Fonterra determines the milk price paid to suppliers, and how sharetrading operates on a day to day basis, are unnecessary,

Proposed share trading change

At present, farmers joining or leaving the giant co-operative, or altering their milk supply must buy or redeem shares through the company.

The proposed share trading scheme would allow the farmers to buy or sell the shares among themselves at any time.

Fonterra says the proposed system would give the farmers more flexibility and enhance their ability to join or leave the co-operative.

However, some other submitters, including the country's second biggest dairy processor and exporter Open Country, maintain the share trading proposal would have an anti-competitive influence.

MAF will make a recommendation to Cabinet by next month on whether the sharetrading among farmers proposal should progress to Bill stage.