Friday, July 1, 2022

Fonterra plan ‘separate to TAF’

Fonterra’s announced measures “to hold on to milk” are separate from any early issues with Trading Among Farmers (TAF), chairman John Wilson says. The five-point plan to support and grow milk supply secures the co-operative’s growth strategy and provides flexibility for farmers. The plan includes a one-for-40 share and unit bonus issue during April, another supply offer to sell economic rights into the Fonterra Shareholders’ Fund (FSF), a dividend reinvestment plan for October, more flexible growth milk contracts, and winter milk contracts to supply a new UHT plant at Waitoa, Waikato.

“With a stable capital base, we now have certainty and can offer farmers more ways to grow milk supply and give them more time to share up,” Wilson said.

The bonus issue (equivalent to 2.5% increase) means more shares available to back current or future production increases, or they might be held as an investment or sold.

Asked to comment on fears the high share price is driving Fonterra farmers into the arms of its dairy-processing competitors, Wilson said the market would determine share and unit prices and the range of measures announced last week were not designed to bring down the share price.

The Dairy Industry Restructuring Amendment Act will mean 250 million litres of milk annually will have to be secured by five processors, which hitherto accessed Fonterra raw milk.

“There will be a lot of competition at the farm gate. That is the reality.”

Fonterra has invested heavily recently in new plants, at Darfield, Pahiatua and now Waitoa, and must secure its milk supply with a range of more flexible measures for farmers.

“For our mature dairy-farming businesses a relatively high share price is very much a positive.

“The younger and expanding farmers are faced with high share, land and cow prices and we can help by being flexible and issuing some more shares,” Wilson said.

The share-up grace period has been extended to six years, or more if milk prices are low.

However, based on current production levels and the developing drought, Fonterra expects 95% of farmer shareholders will not need to buy additional shares next season to match an increase in production.

That stems from the 11% milk production increase last season – when all farms shared up before TAF – the three-year rolling average share standard and now the bonus issue.

Fonterra’s implementation of its new “flexibilities” is timed to take the bite out of the high share price for the minority but will it stimulate more trading of shares?

Two weeks ago a Federated Farmers Dairy councillor said TAF was “gridlocked and dysfunctional” (Farmers Weekly February 25).

Wilson has no doubt there will be a lot more share trading in the second half of the season.

Some farmers might choose to trade their 3000 bonus shares, on the average per-farm production, or to place the economic rights in the FSF.

“The bonus issue signals more liquidity in the market and those who don’t need them can realise the value of them,” Wilson said.

“Farmers haven’t had a lot of dry shares and they don’t know yet how this season will affect the three-year rolling average share standard.”

Although Fonterra made three market announcements last Wednesday, following a Tuesday board meeting, Wilson said the bonus issue, the dividend reinvestment plan and the growth supply contracts were all “flagged” before Christmas in the TAF Offer Document.

“We are implementing what we knew back then would be necessary to ensure TAF operates effectively as intended,” he said.

Fonterra’s directors have also reconfirmed the forecast milk price of $5.50/kg MS and the earnings range of 40c to 50c per share. The TAF prospectus suggested 32c of those earnings would be paid as dividend this financial year, on shares and FSF units.

The bonus issue might trim a cent from the dividend but most shareholders and investors would expect Fonterra to hold firm on 32c, perhaps more if senior management and directors decide on a low retention.

“The bonus share issue will ease pressure on farmers, some of whom have struggled to stay in the co-op due to the requirements to meet the share standard, particularly given the tough conditions many suppliers are facing at the moment,” Fonterra Shareholders’ Council chairman Ian Brown said.

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