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A refresher on Fonterra's Trading Among Farmers

April 30, 2014


Special Advisors Stephen Ward

At the end of March 2014, Fonterra announced a 2014 half-year net profit of $217 million, down from $459 million a year earlier. This 53% drop in profit followed a record high pay out to farmers for the milk supplied to Fonterra. At the same time, Fonterra confirmed that the interim dividend on Fonterra shares would be cut from 16 cents per share to 5 cents per share.

These headline-grabbing figures illustrate the importance of Fonterra's Trading Among Farmers or "TAF" and the potential for conflict between the amount of any dividend paid to shareholders and the amount paid to the farmers for supplying milk. The divergence of the shares and the milk pay-out is a key thing for farmers to consider when looking to buy and sell Fonterra shares and farms that supply Fonterra.

Back in the day…

Farmers who supply milk to Fonterra used to be limited in the number of Fonterra shares that they could hold. Essentially, that number was based on the amount of milk produced by a farm. When a farm was sold, the Fonterra shares would be transferred to the new owner, or redeemed by Fonterra. The principle of open entry and exit into and out of Fonterra meant that Fonterra had to be able to pay a farmer for the Fonterra shares at any time.

Life after TAF

TAF was introduced in late 2012 and changed the way farmers bought and sold Fonterra shares. This has had a flow-on effect for people who are buying and selling dairy farms that supply milk to Fonterra.

A refresher on TAF

TAF is a way for farmers to enter and exit Fonterra. TAF is made up of Fonterra shares that can be either linked directly to milk production - known as "wet shares;" or held by farmers in excess of the wet share requirement as an investment -known as "dry shares."

As well as the wet/dry share distinction, TAF itself is made up of two key parts:

  1. The Fonterra Shareholders' Market - the private, farmers-only, market where farmers can trade Fonterra shares between themselves. Farmers are required to hold the number of shares for their farm's level of milk production. Farmers can hold additional shares, up to 200% of their milk production requirements; and
  2. The Fonterra Shareholders' Fund - this is open to dairy farmers and the public. The Fund enables a wider group of people to trade in Fonterra units (more on units, below).

Fonterra units can be created when farmers decide to convert some of their shares into units and vouchers. The vouchers represent the voting rights and obligation to supply milk. The units are securities that can be traded on the New Zealand Stock Exchange.

The Fund lets non-farmer investors participate in Fonterra, and it provides farmers with an opportunity to exchange some (there is a limit) of their shares for additional capital. In terms of the logistics of these transactions, the shares and units are bought and sold through NZX-operated markets.

So what?

Farmers have more options under TAF. They can hold on to shares after selling a farm (for up to three years), purchase additional shares over the amount of milk produced by the farm, convert shares to units, and generally structure their investment in Fonterra with much more flexibility than before.

The keyword here is investment. All investments carry risks, and investing in Fonterra shares and units is no different. Ultimately, this is a complex area and what is right for each farmer will depend on that farmer's particular circumstances.

But what does it mean for Real Estate professionals?

TAF has affected REINZ members who advise on the sale and purchase of Fonterra-supplying dairy Farms.

Under TAF, Fonterra farmers no longer have to sell their shares to the purchaser or transfer them back to Fonterra. Farmers can sell shares (and units) on-market to other farmers and, in the case of the units, to other investors. TAF is more complicated and it has moved Fonterra shares from being part and parcel of a farm sale to being a financial product in their own right.

From a regulatory point of view, this means that the people who can advise on Fonterra shares has changed.

The shares and units are financial products under the financial adviser regulations. As a financial product and a complicated, "category one" product at that, the consequence is that only Authorised Financial Advisers can advise on Fonterra shares and units. This is a matter for potential vendors and purchasers to consider and both vendors and purchasers should consider talking to an Authorised Financial Adviser when looking at how to structure a sale and purchase.

This article was written by partner Stephen Ward and associate Lydia Cook and published in the April/May 2014 edition of The Real Estate Magazine.