Wednesday, July 6, 2022

Farmers raise multiple TAF concerns

Dairy farmers have a growing suspicion that Fonterra’s new share flexibility may fall flat for smaller shareholders, who will be restricted in the times they can trade. The first big TAF decisions have to be made within 10 days.

Fonterra’s shareholders are in the middle of serious contemplation of the economic rights supply offer and the unit-fund prospectus as the launch of Trading Among Farmers (TAF) counts down this month.

Barring war in the Middle East, as one Fonterra advisor colourfully said, share and unit trading under TAF are expected to begin on November 30.

For all dairy farmers, time is short at the end of long working days, when the brain may not be clear. But the introduction of TAF is complex and farmers have many options.

The first surge of the share price is potentially lucrative. It should add a sizeable margin over the present pegged price of $4.52, and may improve upon the “final price” as determined by the directors.

That would be as a result of unfilled demand from keen investors in the units.

Farmers are able to trade both economic rights and fund units, and perhaps set up win-win outcomes. But they should take investment advice.

As farm accountant Campbell Hay, of Invercargill, pointed out, not all farmers bought their shares at $4.52 or less but may have paid up to $6.80.

“Most of my clients are now fully shared in the expectation of a higher price when the shares are set free,” he said, but added that he did not know of any who are keen to sell economic rights at the first opportunity.

Farmers are cautious by nature and most will prefer to see where the share price will settle before venturing into trading economic rights or units.

Borrowing limits would be a big factor for each farm, and each has a different capital structure, but he thought perhaps rare opportunities to buy land and expand could spark share/rights trading.

“You can always buy more shares, but you only get one chance to buy land next door,” he said.

Would-be fund investors and Fonterra shareholders who wish to place the economic rights of up to 25% of their “wet” shares on the market have until November 21 to make applications.

Meanwhile, there is a growing concern among farmers who have attended Fonterra’s TAF workshops that “Your Opportunity” to trade economic rights or buy units may be a oncer, or infrequent.

Not only is the $525 million tradable units issue for outside investors like to be over-subscribed, because of the dividend yield opportunity and the huge interest here and overseas, but larger Fonterra shareholders could opportunistically fill the rights market.

Under the fund size risk management policy, Fonterra will begin with a Shareholders’ Fund (FSF) size of 7% of the number of shares on issue (1.6 billion), which means a relatively small number of farms could fill the approximately 100 million supply offer.

Many farmers believe that less than 10% of the co-operative’s 10,500 supply farms have up to 40% of the total shares issued, although Fonterra disputes this analysis.

DairyNZ figures disclose about 450 herds over 1000 cows, but nothing is published on ownership aggregation.

“This could be a one-off opportunity to sell the economic rights for the big boys in the South Island to get bigger,” one Northland shareholder said.

“After all, it was the corporate dairy farms which got TAF over the line, and they seem to us to have the most to gain.”

All shareholders will at least gain the difference between the current pegged share price and the first trading price (so-called “final price” to be announced on November 27).

At $5-plus the initial gain would offset a lack of dividends on those shares converted into economic rights for perhaps two or three years.

Sellers of economic rights also have the use of that share capital, setting it free to work elsewhere rather than stay locked up in Fonterra’s balance sheet.

Another farmer observed that TAF was partly sold to farmers over the past five years as self-determination over share capital, to be able to take at least a portion out for other uses such as farm development.

“At best flexibility seems to be ‘now and then’ and not available on a daily basis, so I think we have been misled,” that Northland shareholder said.

On the matter of timing, the Fonterra supply offer booklet says the first of further opportunities won’t be until after the half-year results announcement in March, on which another limit would apply.

Although it suggests that further opportunities will occur twice a year, Fonterra is under no obligation to do so, or to expand the total of economic rights/units in the FSF.

Chairman-elect and TAF architect John Wilson explained that opportunities to trade will be orderly at first while the number of willing farmers is unknown.

Once through the bedding-down stage the freedom to trade will expand, he said.

If Fonterra is required to “seed” the FSF with new shares because farmers are slow to offer up economic rights, it will then have head room to open up further offer periods in the future.

Fonterra does not intend to be a long term holder of its own shares, but will do whatever is necessary to get TAF operational from November 30.

Should it be required to place the whole $500 million worth of new capital, it would dilute earnings in 2012-13 by just one cent per share – a one-off effect.

Subsequent offer periods for supply of economic rights would then eat into Fonterra’s share reserve.

Fonterra retains a number of levers on the FSF size, including the fund transfer limit, the total number of shares on issue, and the allowable proportion of “dry” shares.

At present dry shares are about 2% of total shares, but the risk management policy allows up to 5%.

The fund size risk management policy prescribes an upper limit of 12% of total shares, which is just below 200 million of the 1.6 billion.

Fonterra can also increase or reduce the 5c/kg milk price discount for milk production not backed by shares or vouchers (issued when the economic rights have been sold), thereby incentivising farmers to buy or sell shares.

Farmers also have persistent concerns about the milk price and dividend split, believing that directors are going to have to ensure steadily rising dividends for the new class of unit investor to maintain the co-operative’s reputation in the markets.

Fonterra executives explained the belt and braces around milk price determination, including the panel composition and Commerce Commission scrutiny.

“If farmers are really concerned about the milk price and dividend proportions, they should make sure they remain fully shared to maximise returns,” was the wise advice from former national dairy leader Bill Shepherd.

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