Sept. 18 (Bloomberg) -- Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, will allow its farmer shareholders to increase stakes by 20 percent to help fund expansion after scrapping a plan to sell to outside investors.

Farmers, whose shareholding must match their milk production under current rules, may raise their stakes by as much as a fifth to increase their earnings, Auckland-based Fonterra said in a statement today. The plan should provide sufficient capital until about 2014, according to the statement.

“Many of our shareholders have made it clear that they want to retain 100 percent farmer control,” Chairman Henry van der Heyden said in a statement. Today’s proposals “would strengthen the capital structure and make Fonterra more adaptable and competitive in the international marketplace.”

Fonterra sells about NZ$17 billion ($12 billion) of milk, butter and cheese in 140 countries, and is funded with debt and the shares of its 10,500 farmers. The company had planned to sell stock to outside investors in 2010 to fund overseas investment and maintain its share of global dairy markets.

That proposal, outlined in November 2007, was similar to the 1986 listing of Kerry Group Plc, Ireland’s biggest food maker. The plan was rejected even though New Zealand farmers would have kept 65 percent control of the group and left the company based in the South Pacific nation.

Share Pool

Today’s plan would increase the number of shares in Fonterra, making it possible for farmers to trade among themselves to match their production requirements.

Under Fonterra’s rules, it has to buy back shares from farmers wanting either to leave the co-op or reduce production. In the past two years it had to buy back NZ$1.08 billion of shares as farmers cut output because of drought in New Zealand and a plunge in global prices late last year.

“Fonterra can’t afford to have hundreds of millions of dollars washing in and out of its balance sheet every time milk production fluctuates,” van der Heyden said.

Fonterra’s share price is set annually by an outside valuer and is fixed at NZ$4.52 this season. Farmers will decide in November on the increased share allocation and a proposal to cap the shares at their current price.

While some farmers are struggling, as many as 70 percent may take up some or all of their increased entitlement, Blue Read, chairman of the Fonterra Shareholders’ Council, said on a conference call with journalists.

Use of Funds

Capital raised will be used for a mix of debt reduction and investment, Chief Executive Andrew Ferrier said.

“We have a lot of very high returning projects in the queue for that cash,” he said on the call.

A decision on whether farmers should trade the company’s stock among themselves may be taken next year, Fonterra said. If farmers agree, the company may be able to stop issuing and buying back shares from about 2011, it said.

Fonterra said today that from 2014 it may be able to meet its funding needs from retained earnings, by increasing the shares farmers can own, or by allowing retiring farmers to retain shares in the business.

Another alternative may be to allow selected New Zealand pension funds to hold non-voting stock in the company, it said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net

Last Updated: September 17, 2009 23:47 EDT