Tuesday, 12 June 2012 14:03

Share valuation the real issue – Dutch expert

Written by 

FONTERRA HAS a serious problem but, contrary to the board’s claims, it is not redemption, says a Netherlands-based cooperatives expert.

“Share valuation is really the heart of the problem,” says Onno van Bekkum, chief executive of Coop Champions and a lecturer on cooperative businesses at Nyenrode Business University.

Van Bekkum has produced a report for a group of Fonterra shareholders concerned at TAF’s implications for the cooperative’s future, and supplied an exclusive preview article to Dairy News.

“There has been a lot of good thinking gone into this [TAF] proposal. But I fear with this impressive level of technical detail farmers might lose sight over the bigger picture,” he warns.

He doubts share trading will contribute to a stable cooperative, and says he can’t think of any example where such a system has worked to the satisfaction of farmers.

“I’ve just seen many cooperatives going down the drain when investor interests start prevailing over producer interests. That’s what TAF does: it deliberately creates a separate cluster of investor interests – both internal and external. You don’t want that in a cooperative. You want to keep a clear focus on producer interests.”

While he has concerns at what is effectively a scheme that will encourage some to cash in their shares, it would be understandable if it was a means to raise capital, he adds.

“Then at least you would build up something.”

As it is, the trading of dividend-bearing units linked to shares will simply drain up to 20% of dividends from the cooperative.

“If you decide to trade, why not start trading internally?”

He also doubts Fonterra will be able to limit the fund size, as it suggests.

“I don’t think farmers would vote in favour
of TAF thinking they won’t be using the fund. There will always be moments when people are in need of cash.”

He notes the blueprint itself mentions “avoiding a flood of shares into the fund after launch”.

“I fear it might not be long until the constitutional limit of 20% may be reached, with or without shocks created by droughts, diseases, financial crises, etc. And then what?”

The board has several options, as proposed in the risk management policy.

“Firstly, buying back units, which means you’re basically back on a track similar to redeeming shares. So how much do you gain from TAF?

“Secondly, introducing dividend reinvestment. Great, but you don’t need TAF for that!

“Thirdly, reducing the transfer limit, which requires members to buy back a portion of their shares: I’m not sure if that would really work in practice.

“Fourthly, issuing shares, to farmers presumably. Does that mean raising the limit on dry shares? Doesn’t that mean we’re further down the sliding slope then?

“Fifthly, altering the constitution to allow more than 20% in the fund. Is that what a ‘preferred option’ – to be recommended at a ‘special meeting’ for shareholders – could also be about? That, again, is risky.”

Van Bekkum says he would solve Fonterra’s valuation problem without introducing dry shares.

“The restricted share value was a step in the right direction.”

End-of-season transaction, a rolling three season-average production/share requirement, and three years to buy in/out all make sense, as does dividend reinvestment.

The fact that reducing share value to the restricted figure of $4.52/share from its $6.79 peak passed without uproar from farmers is a positive sign that shareholders, in general, are not overly focused on share value, he says.

“As the leadership has begun to see, the basis of any strong capital base is retained earnings. I think these are sufficient ingredients for a robust capital structure. I would be inclined to think you might not really need TAF.”

As for redemption risk, TAF effectively passes it to farmers.

“I think it’s not fair simply to pass that burden on to farmers’ shoulders. It’s not particularly cooperative. It’s amazing that farmers just accept that without discussion.”

More like this

All eyes on NZ milk supply

All eyes are on milk production in New Zealand and its impact on global dairy prices in the coming months.

"Our" business?

OPINION: One particular bone the Hound has been gnawing on for years now is how the chattering classes want it both ways when it comes to the success of NZ's dairy industry.

Farmers' call

OPINION: Fonterra's $4.22 billion consumer business sale to Lactalis is ruffling a few feathers outside the dairy industry.

Wasted energy

OPINION: Finance Minister Nicola Willis could have saved her staff and MBIE time and effort over ‘buttergate’ recently by not playing politics with butter prices in the first place.

Featured

Australia develops first local mRNA FMD vaccine

Foot and Mouth Disease outbreaks could have a detrimental impact on any country's rural sector, as seen in the United Kingdom's 2000 outbreak that saw the compulsory slaughter of over six million animals.

NZ household food waste falls again

Kiwis are wasting less of their food than they were two years ago, and this has been enough to push New Zealand’s total household food waste bill lower, the 2025 Rabobank KiwiHarvest Food Waste survey has found.

Editorial: No joking matter

OPINION: Sir Lockwood Smith has clearly and succinctly defined what academic freedom is all about, the boundaries around it and the responsibility that goes with this privilege.

DairyNZ plantain trials cut nitrate leaching by 26%

DairyNZ says its plantain programme continues to deliver promising results, with new data confirming that modest levels of plantain in pastures reduce nitrogen leaching, offering farmers a practical, science-backed tool to meet environmental goals.

National

All eyes on NZ milk supply

All eyes are on milk production in New Zealand and its impact on global dairy prices in the coming months.

Machinery & Products

Leader balers arrive in NZ

Officially launched at the National Fieldays event in June, the Leader in-line conventional PRO 1900 balers are imported and distributed…

JDLink Boost for NZ farms

Connectivity is widely recognised as one of the biggest challenges facing farmers, but it is now being overcome through the…

New generation Defender HD11

The all-new 2026 Can-Am Defender HD11 looks likely to raise the bar in the highly competitive side-by-side category.

» Latest Print Issues Online

Milking It

Full cabinet

OPINION: Legislation being drafted to bring back the controversial trade of live animal exports by sea is getting stuck in the…

» Connect with Dairy News

» eNewsletter

Subscribe to our weekly newsletter