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Less than a third of farmers opt to buy Fonterra’s ‘dry’ shares (Update 1)
January 25th, 2010Fonterra announced that less than a third of its farmer shareholders had opted to buy ‘dry’ shares in the dairy cooperative, raising NZ$270.7 million in fresh equity. The announcement follows plans announced last week by Fonterra to raise up to NZ$250 million through a bond issue to local investors to repay foreign debt. (Updated to include percentage raised).
Fonterra offered to sell around 256 million extra ‘dry’ shares at NZ$4.52 to raise NZ$1.16 billion, suggesting the equity raising was accepted by those controlling just 23% of its shares.
Here is the full statement below from Fonterra.
Fonterra’s farmer shareholders have invested $270.7 million buying shares in their Co-operative following last year’s changes to capital structure.
In a share application period that ended last week, farmer shareholders were 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.
Out of Fonterra’s 10,500 farmer shareholders, 3,461 subscribed for a total of 60 million shares worth $270.7 million both to cover anticipated increases in production for the current season and as additional or “dry” shares in excess of production, while 59 applied to surrender a total of 1.6 million shares worth $7.3 million.
Under the capital structure changes, which received almost 90 per cent support from farmers voting at November’s annual meeting, farmers now have greater flexibility in the number of shares they own in proportion to their milk production – rather than adjusting their shareholding up and down each season strictly in line with milk production.
As an incentive for farmers to hold a buffer of dry shares in excess of production, all shares held on dividend record dates are now eligible for any dividend payments based on Fonterra’s profitability.
Fonterra chairman Sir Henry van der Heyden said farmers had responded well to the share issue, despite the difficult circumstances many of them were currently facing.
“It’s very pleasing that a significant number of our farmer shareholders have shown their support for the Co-operative by taking up more shares. This is despite the fact that cash flows continue to be tight and drought conditions are starting to bite in some parts of the country – making it hard for many farmers to take up additional shares right now.
“In addition, there are farmers whose production is growing this season and who have purchased more shares to ensure they are entitled to the full financial benefits available for share-backed production this season.”
Sir Henry said that because individual farmers’ situations differed greatly, Fonterra had set no expectation on how much new share capital would be raised during the application period.
He said it was important to remember the capital structure changes were not just intended to raise additional capital from dry shares, but also sought to reduce the risk of capital leaving the Co-operative through share redemptions when milk production fell.
“As drought is lowering milk production in some regions, a significant number of our farmers may end the season with dry shares in excess of their production. They will now have an incentive to hold onto these shares as they will be eligible for dividends paid on all of the shares they hold.”
Sir Henry said all farmers would have a further opportunity to adjust their shareholdings during the traditional end-of-season trading window in mid 2010.
Tags: Dairy farming, Fonterra
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January 25th, 2010 at 4:51 pm
The farmers have all their money tied up in Taupo lakefront property and batches
January 25th, 2010 at 6:22 pm
I’m surprised the take up was that high… on average each farmer has chipped in about $78k to Fonterra….
January 25th, 2010 at 6:28 pm
Not too surprising – given that NZ farmers already have too much debt so would only be paying Fonterra’s debt by accumulating more debt on their own balance sheets.
The end-to-end NZ dairy model still has too much debt so it will be interesting to see how it all plays out. As Rabobank point out, debt needs to be serviced and such leverage is dangerous when payout falls. The proposed syndicate for Hart’s farms will likely be funded by int’l equity, is situated in the productive waikato region, and is likely to have substantially lower overheads that Fonterra. Once they get up and running they should be able to offer a higher payout than Fonterra to Wiakto farmers and not require any equity input from farmers.
January 25th, 2010 at 6:40 pm
PeterR summed it all pretty well on this thread
# PeterR Says:
January 25th, 2010 at 10:50 am
Farmer Bob,
Thanks. I am happy to clarify those points.
I was too conservative with my statement that your costs per Kg of milk solids production were $1.00 below the national average.
You said your farm working expenses were $2.70 per Kg. I am not sure why you don’t say that has now changed to $3.04 per Kg? Anyway you are claiming ‘total costs’ of $3.04 including management.
The MAF equivalent figure (which includes depreciation) is total farm operating expenses. It is $4.50 per Kg of milk solids for the Waikato-Bay of Plenty in 2010. So your costs at $3.04 are $1.46 per Kg milk solids lower than the region average.
MAF’s $4.50 is after major cost reductions from the 2009 season when it was $5.22. Some of those cost reductions that are unlikely to be from price decreases and that will not be sustainable include:
Lime: –47%
Other expenditure: –41%
Repairs and maintenance: –31%
Falling dairy commodities: the USDA reports spot prices for dairy commodities. These prices are good enough that Fonterra use them in their annual reports.
For Oceania spot prices (converted to NZD) fell between the 25/12/09 and 22/01/10 as follows:
Butter: 5711 to 5080, -11%
SMP: 4724 to 3996, -15%
WMP: 5006 to 4403, -12%
In Europe prices started to fall a little earlier – between 11/12/09 and 22/01/10 as follows:
Butter: 7157 to 5622, -21%
SMP: 4801 to 3827, -20%
WMP: 5586 to 4707, -16%
You can find these prices graphed here from 2007:
http://agprodecon.org/images/DairyPrices/OceaniaDairyPricesNZD220110.gif
But the real picture is not spot prices but actual export receipts. These lag and under perform spot prices. The most recent graph I can find on the web is to October 2009. It doesn’t look good but I expect the numbers will be better for November and December:
http://agprodecon.org/images/DairyPrices/MonthlyNZDairyExportPrices271109.gif
January 25th, 2010 at 7:36 pm
Boris the Frog,
I don’t think the take up is as high as it looks. I believe the way the deal was set up made it sensible for anyone expecting to need additional shares because of increased production this season to take them now rather than mid year.
January 25th, 2010 at 8:11 pm
PeterR –As I’ve said on other threads I cannot understand why the dairy industry doesn’t operate a lease system to cover production increases for a season , just like the fishing industry. If guys in Canterbury ( for example ) are having a great season this year they just lease production “entitlements / shares ” from say the Northland guys who are having a hard time this year , to cover their “over run “. Obviously this only applies to production variations due to seasonal factors , not someone who has increased farm size and/or herd size.
January 26th, 2010 at 8:45 am
Anyone who thought this offer would be taken up in any meaningful volume either had a bulge in cheek or a recent labotomy. Did not even make 20% of requirement and oooh Fonterra will need better rear vision or narrower paths to travel…..
January 26th, 2010 at 8:05 pm
fonterra going to use the 270mil as security borrow another 250m according to lochie
how many billions of debt do they have now?
http://www.odt.co.nz/news/business/90607/new-039udders039-fonterra-acquisitions
January 26th, 2010 at 9:37 pm
Lachlan also made some other points;
“While there’s been much uninformed comment on Fonterra’s debt, the cooperative’s debt-to-debt plus equity ratio trajectory is tracking back to board guidelines of 45-55 percent.
“This ratio means debt is not the issue but having equity to seize opportunities is.” Mr McKenzie said the federation estimated that at least 50 percent of farmers did not have the ability to buy shares, with banks tightening up lending and dry conditions affecting farm budgets.
While it was understandable that many farmers were acting conservatively, the amount Fonterra raised – in a sharemarket context – would have been second only to the $450 million dual float of retailer Kathmandu on the NZX and ASX last year.
Slightly different view to the spin and speculation on this board.
January 26th, 2010 at 10:54 pm
Farmer Bob.
I am pleased you liked the data I provided on MAF costs and dairy commodity prices.
You seem to have inside running on these sort of things, so can you explain to those of us who don’t know as much as you why Fonterra’s debt-to-debt plus equity ratio that you refer to (I don’t think it is audited) looks so much better than the debt ratios they file with NZX?
January 26th, 2010 at 10:59 pm
pwilkie,
Thanks for that link – it provides something for potential bondholders to consider.
Fonterra’s liabilities in their last annual report exceeded $11 billion.
January 26th, 2010 at 11:37 pm
fonterra total liabilities
31/01/2009———–17.96 billion say 18
08————————14.44
07————————13.49
05————————11.81
02————————11.8
http://media.nzherald.co.nz/webcontent/document/pdf/Fonterra.pdf
this link is out of bryan gaynor article link below—to right of photo
http://www.nzherald.co.nz/commerce-commission/news/article.cfm?o_id=43&objectid=10598212&pnum=0
equity going south
09—3.79 billon
08—4.27
07—4.98
05—4.91
02—4.49
January 27th, 2010 at 12:40 am
pwilkie,
Those liabilities are not those Fonterra’s accounts show, but you could get such numbers or close if you treated their shares as liabilities i.e. redeemable at Fonterra’s share value.
January 27th, 2010 at 6:43 am
pr– agreed –the 09 profit +loss is at odds with what i put up at 11.37–cheers
http://media.nzherald.co.nz/webcontent/document/pdf/fonterraResults.pdf