Redemption risk lower, supply risk higher

One of the main factors behind Fonterra’s decision to introduce Trading Among Farmers (TAF) was to reduce redemption risk.

That’s the risk the company faced in having to buy back shares at a high price when people left the industry or production was much lower than their shareholding entitled to them to.

TAF allows farmers to trade shares among themselves.

But has the reduction of redemption risk been replaced with an increase in the risk of supply?

The share price is higher than most analysts think is warranted and it adds a considerable expense to signing up to Fonterra.

There are other options now and Federated Farmers believes the 7.5 percent shareholding in Synlait taken by FrieslandCampina Investments Holding BV1, a subsidiary of Dutch Dairy Cooperative giant FrieslandCampina, could shake-up the New Zealand dairy industry.

“While the monetary value is modest at around $24.15 million the message it sends is powerful,” says Willy Leferink, Federated Farmers Dairy chairperson.

“As a cooperative, FrieslandCampina’s revenues are similar to Fonterra’s. You could describe the investment in Synlait as a ‘toe-dipping’ exercise but clearly there is an underlying desire to get exposure to New Zealand liquid milk.

“FrieslandCampina easily has the financial means to acquire more of Synlait later if it so chooses. Its cornerstone shareholding is to us more like a beachhead.

“It is also significant that even after the public float, Holland’s FrieslandCampina will have a strong shareholding alongside Bright Dairy and Food Co of China and Mitsui & Co of Japan. The prize is clearly Asia.

“While other investors have not meant much to Kiwi dairy farmers, FrieslandCampina most certainly will.

“Having one of Europe’s largest cooperatives enter our market, albeit through a commercial shareholding, may just spark a discussion over how the domestic cooperatives will respond; Fonterra especially.

“While the focus of the last Dairy Industry Restructuring Act (DIRA) review was on Fonterra’s financial redemption risk, Federated Farmers was concerned at the potential for supplier loss.

“Fonterra’s current model is that all suppliers, save for some, either have three seasons to ‘share-up’ or go onto contract milk. Even with contract milk, you have to agree to share-up with Fonterra within six-years.

“Sharing-up in Fonterra is currently done by buying those bank unfriendly highly priced shares. To us there has to be a change here. A modified “Friends of Fonterra” is how I put it in an opinion editorial.

“What is for certain, things have become very interesting in the dairy industry,” Mr Leferink concluded.

The investment by FrieslandCampina isn’t large but it could give farmers more confidence in Synlait and make supplying the company more attractive.

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