Open letter: Trading amongst farmers?

Please see the following open letter to dairy farmers from Laurie Margrain, Chairman, Open Country Dairy.

An open letter to dairy farmers from Laurie Margrain, Chairman, Open Country Dairy

Trading amongst farmers – will it be good for your business?

Stage 3 of the Fonterra capital restructuring programme proposes that Fonterra shares should no longer be redeemed by the company. Instead the right of redemption will be removed and replaced with a right to trade on a restricted share market. In our view extinguishing the right of redemption that farmers currently enjoy will have major consequences for the dairy industry.

What does that mean for farmers? We think you should consider the following when being asked to surrender the certain rights of redemption for the uncertain chances of trading.

Loss of value
One effect will inevitably be to reduce the value of the shares. The independent mid-point valuation in a restricted market where farmers trade shares amongst themselves is $3.83 as opposed to the current value which is set at $4.52. The valuer noted there is some uncertainty as to the discount that should be applied in a restricted market but it has been assessed in the 20 – 30% range. This would be the lowest value placed on the share since Fonterra was formed and will surely limit the ability of farmers to get an economic return for their shares if they wish to sell.

Loss of liquidity
Whether as a buyer or a seller, there is no guarantee that a liquid market will exist for the shares. With redemption, farmers have the certainty that they can sell their shares to the company if they wish to exit or reduce production at a fair value. Without the ability to have their shares redeemed, farmers will need to
take their chance on the value set by the open market with a very limited or eligible pool of buyers.

Impact on Bank Security and Equity
Bank securities are based on the value of the business including share value. If the value of the shares is discounted under a restricted market this will affect the level of fi nance which banks will support or continue to maintain. Farmers equity levels could fall substantially, in the event TAF has the forecast reduction on
share price.

Loss of performance
Capital should never be taken for granted. The best tension on any business or management to perform is the threat of losing capital. That tension drives effi ciency, continuous improvement, competitiveness and a hunger for success. When you remove the mobility of capital, lock shareholders capital into a business (as TAF does) those tensions disappear – as will performance. Value follows performance.

Removal of choice
Choice is one of those things that we do not value until we lose it. Currently many farmers have a choice about which company they supply and where they put their capital. If the right to have shares redeemed is removed by Fonterra , then any farmer who would like to exercise their choice may not be able to if the
value of the shares does not match their initial cost. The effect would be to eliminate competition for supply, which would reduce incentives for ongoing productivity and innovation gains. It is Open Country Dairy’s view that there must be room for both the cooperative and independent models to co-exist in New Zealand for a truly competitive market to operate. And it is Open Country Dairy’s view that the market for raw milk
must be a free competitive market for the industry to prosper.

There are two principal reasons to safeguard a system which maintains competition in the marketplace.
The first is to continue to give farmers choice – real choice about who they supply their milk to. Farmer choice and competition for milk supply is a prerequisite for the industry to achieve the productivity and efficiency gains it needs to remain internationally competitive. It will ensure that farmers have the opportunity to improve their productivity and be rewarded for it as well as provide a catalyst for processors to invest in their own productivity.

The second is to promote and demonstrate fair competition in the international marketplace for dairy products. This will ensure that our trading partners do not use the argument of anti-competitiveness to impose tariff or non-tariff barriers against our dairy products or to stall New Zealand’s endeavours to achieve more favourable trading relationships with our major markets. Consumers and markets don’t tolerate monopolies. A competitive market can only operate if dairy farmers have the freedom to choose their preferred company and what to
do freely with their own capital – a real and genuine choice.

Confiscating or restricting farmers capital doesn’t solve the capital structure issues for Fonterra – it just masks them. We support a strong Fonterra in the marketplace but we also believe that choice and innovation is essential for this industry to prosper.

Laurie Margrain
OPEN COUNTRY DAIRY

ENDS

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