Farmers have overwhelmingly voted to accept Fonterra's capital restructure plan which will allow them to trade shares among themselves and the public to indirectly invest in the dairy co-operative for the first time.
A resounding "yes" vote of 89.85% was recorded to pass the Trading Among Farmers plan at a meeting in Palmerston North today and through online and postal voting.
Chairman Sir Henry van der Heyden said the constitutional changes this will create for Fonterra will be a lasting capital solution.
"Effectively our vote today for Trading Among Farmers will, together with the co-op's new retention policy, take capital structure off the table for the foreseeable future."
The dairy giant said it was delighted with the outcome and reiterated that the successful yes vote will result in more choice and control for its farmer shareholders.
"As farmers we'll also know exactly what a Fonterra share is worth at any time. We'll have the flexibility to buy and sell shares when it suits our cash flows. And we'll have the choice to free-up some of our share capital through the Fonterra Shareholders' Fund." Van der Heyden said.
Most importantly for Fonterra, the new trading market removes its commitment to buy back any shares from farmers leaving the co-operative or lowering their milk production levels. It thus lessens the money washing in and out as farmers purchase or redeem Fonterra shares at the end of the season.
Van der Heyden said before the vote, which needed 75% of farmer shareholder approval, that Fonterra always knew the co-op's balance sheet would eventually come under pressure from that redemption risk and it was really felt during the 2007/08 drought when Fonterra lost equity of about $600 million as production fell and farmers opted out.
The Fonterra chairman also warned that New Zealand's milk supply cannot keep on growing at the same pace it has been forever.
"There are physical limits to the expansion of dairying, and alternative land uses may take some land out of dairying in years to come.
"If there's a limited pool of milk, other processors will always want a slice of the action and we may see some well-capitalised competitors from overseas competing with us."
Farmers appear to have agreed that the massive co-op must protect itself from that competition by removing the redemptive risk and building a more stable capital platform.
Farmers can also now own additional "dry" shares above their milk production levels (at two times annual production), buy and sell shares among themselves at the market price through the Shareholders Market or let the co-op buy and sell shares on their behalf.
They can also sell the dividend rights to their shares to the shareholders' fund, but Fonterra has been keen to stress that the farmers will always retain the ownership and voting rights of the shares.
Van der Heyden said at the meeting today that the board had listened to farmers who strongly opposed its 2007 re-structure which would have traded some ownership rights.
"You were concerned in 2007 about the thin edge of the wedge. There is no thin edge of the wedge with this new proposal. It retains farmer ownership - voting stays with farmers."
Instead, the shareholder fund, which Fonterra has previously said would target financial institutions and "friendly" investors like retired farmers, would act in a similar way to a bond market for investors while providing ready cash for farmers.
The fund will pay farmer shareholders for the right to receive dividends and the gain/loss from any change in value of those shares while farmers can buy back their entitlement to dividends and any change in the share price when they want to at the prevailing market price.
Farmers will still be paid their full share-backed milk price, remain the owner of their shares and retain all their voting rights based on share-backed milksolids.
The fund, which will have no voting right in the co-op, will raise the money it needs to pay farmers by selling investment units which will be administrated through a registered exchange.
The other notable parts of the plan are:
- The Board will target an overall cap on dry shares at 20% of the total number of shares on issue, with provision to extend the cap by 5% in extreme circumstances.
- New and current farmers will be able to share up over three years to cover additional production, while exiting and current farmers will have up to three years to sell their Fonterra shares.
- Farmers will receive a higher price for share-backed milk compared with unshared milk to encourage them to back their production with shares as quickly as possible. Only shares backed by milksolids will have voting rights.
- A range of mechanisms will be put in place to ensure there is a sufficient volume of shares to buy and sell. One or two substantial financial institutions will be appointed to provide plenty of volume in the market and less fluctuation in price. These "Registered Volume Providers" will buy and sell shares in a similar way that banks buy and sell foreign exchange, with Fonterra setting their charges.
Fonterra says work will now begin on developing the details of Trading Among Farmers which they expect to implement in 2011/12 with the involvement of the Shareholders' Council.