Fonterra Farmers Approve Plan to Open Exporter to Equity Markets

Fonterra Cooperative Group Ltd.’s farmer shareholders approved measures that open the world’s largest dairy exporter to equity investors for the first time.

Trading Among Farmers, a plan that allows the New Zealand company’s 10,500 members to privately trade shares or sell them into a publicly traded fund, was supported by 66.5 percent of voters, Auckland-based Fonterra said in a statement. Farmers that voted represented 85 percent of the co-operative’s milk solid production, according to the statement.

“We will now be able to implement our strategy and remain a relevant player in the global dairy industry,” Chief Executive Officer Theo Spierings said in the statement. “With overall demand for dairy growing, TAF will ensure that we are well placed to grow volumes and protect our position.”

The plan allows investors to trade units linked to Fonterra’s performance, and the securities will carry no voting rights or entitlement to farmers’ milk payout. The vote is the second on the proposal after the company was forced to review an earlier plan because some farmers said external investors may exert pressure to raise dividends at their expense.

Fonterra says the plan will help ease pressure on its balance sheet as it seeks to expand in markets such as China and India, tapping a forecast surge in demand for dairy products. The company is constrained by its obligation to buy shares from farmers who wish to sell when cash-flow is tight and would rather use that spare capital for new investment.

Constitutional Changes

Trading Among Farmers required at least 50 percent support to proceed. Members were also asked to vote on constitutional changes that tightened limits on the fund’s size. Fonterra needs to seek Shareholders’ Council support for that resolution after getting 72.8 percent and requiring 75 percent.

“On one side, the farmers think the capital markets can’t wait to get their hands on the business,” said Paul Glass, chairman of the investment committee at Devon Funds Management Ltd. in Auckland, before the vote. “On the other side, the capital markets are actually very cautious about what we’re being offered.”

Some investors are concerned about the lack of voting rights or share of the milk payout, said Glass. While farmers will reap the benefits of any rise in milk prices, the subsequent costs that will add to other parts of the business could affect profits and reduce dividends, he said.

‘Unique Plan’

“The wealthier farmers, or the ones who have got less debt, will end up with a bigger share of Fonterra,” said Greg Boland, director of financial markets at broker OM Financial Ltd, before the vote. “So the wealthy will get wealthier and the others won’t.”

The plan is unique to Fonterra, according to company spokesman Liam Baldwin. Opponents cite Irish dairy company Kerry Group Plc as an example of co-operatives ceding control to external investors. The company was formed when Kerry Cooperative agreed to sell as much as 49 percent of its shares in 1986, according to the Netherlands Institute for Cooperative Ownership. The co-operative’s holding has since been reduced to 17 percent, according to data compiled by Bloomberg.

Dairy costs tracked by the United Nations had the biggest drop since January 2009 last month, pushing global food prices 4.2 percent lower. Output in New Zealand climbed 10 percent in the 2011-2012 season and supply gained in Australia, Europe and the U.S. after mild weather and surging prices in 2011 spurred farmers to boost production. Whole-milk powder has tumbled 18 percent this year, according to Fonterra’s trade-weighted index.

November Offer

Fonterra plans to keep the size of the fund, scheduled to list on the New Zealand stock exchange in November, at around 7 percent to 12 percent of total shares with a minimum NZ$500 million ($394 million) value at the offering.

The company, which accounts for about 40 percent of the global trade in dairy products, forecasts the market will increase at least 100 billion liters by 2020, led by China, India and the Middle East-Africa region, Spierings said in a March 29 conference call. New Zealand output will rise about 5 billion liters in that period, he said.

The company in April said it would spend NZ$100 million on two more dairy farms in China’s Hebei Province, increasing to five sites eventually with 15,000 producing cows.

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