The National Bank studies Fonterra’s proposed changes in capital structure, and looks at how new generation co-operatives( two UK and two NZ NGC’s)  have performed in the market.

They say it seems clear that the financial performance of a new generation co-operative needs to be very strong to support the price of a restricted share close to asset backing. The report shows that share price premiums/discounts over asset backing are quite variable between companies and for the same company over time.

Around one third of Fonterra’s farmer shareholders have spent $270.7 million buying up new shares in their co-operative as part of changes to its capital structure. Fonterra’s farmer shareholders have been given the opportunity to adjust their shareholding up or down, to anywhere between 100 and 120 per cent of their current or expected production, at a price of $4.52 per share.

In November nearly 90 per cent of Fonterra farmers voted in favour of allowing themselves to buy into an extra 20 per cent of the co-operative. The move came as part of a three-stage restructuring of the business, as Fonterra said it required more capital to address risks to its balance sheet caused by farmers cashing in their redeemable shares reports The NZ Herald. The new shares would also help Fonterra’s global and domestic growth. Previously, Fonterra farmers were only able to buy one share for every kilogram of milk solids they produced.

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Half of farmers won’t be able to afford to buy the additional shares being offered by Fonterra from today, farmer lobby group Federated Farmers says. Fonterra’s farmer owners voted in favour of allowing themselves to take up an extra 20 per cent in the co-operative last month as part of a three-stage capital restructure of the business. Fonterra needs more capital to address the risk to its balance sheet of its farmers cashing in their redeemable shares, and to fund global and domestic growth ambitions.

At the moment its 11,000 farmers must buy one share for every kilogram of milk solids they produce but the change allows them to take up an extra 20 per cent of “dry” shares which don’t have voting rights but will be eligible for a value-add dividend payment. Federated Farmers dairy chairman Lachlan McKenzie said he didn’t expect farmers to be rushing to buy the shares straight away because many had yet to receive all the information reports The NZ Herald.

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Fonterra shareholders look set this week to approve the first two of three steps of its capital restructuring proposal, but resistance to the third stage, which will be considered next year, is already evident reports The ODT.  Farmer attention has already being drawn to that contentious third step, the trading of shares among farmers, which will not be debated at Wednesday’s annual meeting in Ashburton.

Company and farming leaders appear confident the initial vote on the first two stages – strengthening the share structure and restricting the value of company shares – would get the required support of 75% of voters.  Some have questioned whether Fonterra would achieve its goal of attracting extra capital from shareholders, with farmers more likely to use income from higher milk prices to reduce debt and restore cashflow than buy extra shares.

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Would-be Fonterra director Russ Rimmington is proposing the dairy co-operative investigate creating a bank for dairy farmers. Mr Rimmington, a candidate in the Fonterra board elections, said the idea came from a South Island shareholder reports Stuff. The bank would not be a piggy bank for farmers under pressure, but a stand-alone business funded by private equity which specialised in loans for land, herds, dairy plant and farm machinery.

Using the TSB Bank, which his brother Kevin headed for 23 years, and Kiwibank as examples of what Fonterra could achieve, Mr Rimmington suggested branches could be established in the co-operative’s RD1 stores. Multinationals, such as Claas and John Deere, had their own banks. New Zealanders can own their own banks,” he said. “We had PostBank and sold it off. We also had the RuralBank and sold that, so maybe it’s time to have the Fonterra Co-operative Bank.”

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Fonterra farmers keen to get an early start on share trading under the big co-operative’s capital restructure plan will have to wait while leaders focus on getting more fundamental housekeeping changes through a shareholder vote next month. It was notable there were calls for all three steps in the five-year programme to be introduced at once, which would mean introducing the third step – share trading between farmer-shareholders – earlier than planned reports the NZ Herald. Company leaders do not want to start discussions on this leg of the restructure until next year. An active market had to be set up and with great care, and the co-operative was not ready.

Chief financial officer Jonathan Mason said in the Friday broadcast Fonterra had $500 million to spend a year. Of this, $400 million was earmarked for essential operating costs, leaving only $100 million to pursue a one-time window of opportunity to boost marketing of the co-operative’s technical expertise and product innovation.

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Fonterra has today mounted a second attempt to persuade its 10,700 shareholder farmers to back a capital restructuring plan. The three-step proposal could take care of Fonterra’s capital needs for about the next five years while retaining farmer control and ownership reports The NZ Herald. Fonterra wants to:

* Allow farmers to hold shares equivalent to 120 per cent of their milk production, a 20 per cent increase, with incentives to hold shares even if their production falls;

* Cut the value of the shares because ownership is restricted to cooperative members;

* Later move to trading of shares between farmers, without them first having to be sold back to the cooperative.

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For years we have listened to farmer groups complaining about the high dollar and the way the Americans and Europeans distort dairy prices with subsidies. Nothing seems to change reports The NZ Herald. Yet it seems dairy farmers would rather live with extreme volatility year on year than contemplate floating a minority stake of their consumer foods business on the NZX.

The irony is that dairy farmers fear losing control if Fonterra lists, yet the status quo leaves them powerless to control the price they get for their produce. The payment they get for the milk powder that Fonterra sells wholesale to the world rises and falls on the fortunes of the US dollar and the supply and demand dynamics of commodity markets.

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Dairy giant Fonterra is expected to unveil its second proposal for capital structure reform within days as the threat to its world-beating exporter status gathers pace in rival dairying countries. Parties close to the capital structure reform plan indicated NZ’s biggest company would reveal the long-awaited proposal within a fortnight reports The NZ Herald.

Fonterra, with revenue of $19 billion last year, is a co-operative owned by farmers through redeemable shares. To advance its global growth ambitions and stabilise its balance sheet against shocks such as drought, Fonterra needs more capital.

A proposal by directors last year, which involved forming a company outside the co-operative with publicly listed shares, was rejected by Fonterra’s 7000 farmer owners who feared loss of control and ownership.

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Prime Minister John Key has made an announcement that will come as a windfall to rural people desperate for fast broadband reports Scoop. Mr Key has told the Country Channel the government is to spend hundreds of millions of dollars more than originally earmarked for rural broadband. The Prime Minister says broadband is a commercial must for agriculture and the expanded plans will help boost productivity on the land. He says the days of painfully slow dial-up connections for rural customers have to come to an end and the government’s determined to see farmers catch up with urban New Zealand so they can run their businesses much more efficiently.

And in a two-part interview, the Prime Minister has told John Stewart on The Country Channel’s in-depth Newsmakers programme that the government will not stand in the way of any changes to Fonterra’s capital structure. He says he understands that the farmer-owned dairy colossus needs an ownership structure that will enable it to raise equity. But Mr Key says any decision on the ultimate ownership of Fonterra rests with its owners – the vast majority of the country’s dairy farmers.