Brown agreed that the unit market was driving the share value, which had peaked at about $2 higher than the opening price set by Fonterra last November. He was asked how the FSC and the cooperative intended to ensure that shareholders could trade readily, when most were deterred by the high value of the shares.
“A small group of non-farmer investors have created gridlock in the shareholder base and rendered the share market dysfunctional,” one delegate said.
Brown agreed that the unit market was driving the share price at present while the co-op was in the first six months, which is a sort of moratorium when new units cannot be created.
Farmers at the meeting spoke of pent-up demand for units from institutional investors, like CBA (8.58%), Perpetual (6.1%) Citicorp and JP Morgan.
“There are lots of people wanting to buy rights at $6.50,” said dairy council chair Willy Leferink.
“No farmers are selling off their rights and they don’t want the Fonterra Shareholders Fund (FSF) to get any bigger. So there’s a stand-off at present and farmers are wondering when they start trading will that drive down the share price?
“We voted for flexibility with TAF but right at the moment we haven’t got it.”
Brown disagreed with Leferink and listed the ways in which he believes TAF has introduced flexibility for shareholders and the cooperative.
These included the three-year rolling average for the share standard, three-year growth contracts, some farmer access to their share capital, options for retiring farmers to remain invested and greater transparency for the share price, which held with all other major farming decisions, such as supplementary feeding and land purchasing.
“We have a much greater awareness of Fonterra’s global strategy, especially consumer effects like the reactions of parents to concerns with infant formulas.
“Farmers are more aware that their obligations and responsibilities don’t stop at the farmgate.”
New Zealanders also have a greater understanding of Fonterra’s purpose, and “that we are just not exporting the resources of this country”.
But Brown agreed that the major risk of the high share price is the inducement of farmers to leave the cooperative, which he called a “short-term decision”, and the council and Fonterra directors are looking at remedies.
“If share value constrains milk growth it will be addressed,” he said.
When pressed to give details of any new share-up provisions Brown declined, saying there was already a three-year transition.
“The objective is to have fully shared up farms, and if a farmer is in no better financial position to pay for shares in three years, what does that say?”
Brown also went back to first principles on TAF, saying that it gave the cooperative permanent capital.
“There was redemption risk before TAF and the true cost of that risk was borne by those farmers who chose to stay with the cooperative for the long term.”
He said a value-add strategy ensured that value builds up in the company and if it doesn’t get expressed in the shares then it will come out in the prices paid for farms or for inputs to dairying.
“We also want to retain the integrated model, from cow to customer, which is the envy of many of Fonterra’s rivals, so that you own the benefits.”