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BNZ Gets Behind Dairy Industry Expansion

Bank Of New Zealand Gets Behind Dairy Industry Expansion

Bank of New Zealand today launched a finance package that will assist Kiwi Co-operative Dairies suppliers meet the industry’s commitment to four percent annual productivity growth.

Managing Director Peter Thodey said the package was a first for the banking industry and underlines the Bank of New Zealand’s ongoing commitment to provide innovative financing for an industry that is recognised as a global force.

“In essence, the Farm First Dairy Share Loan product recognises the fair value of Kiwi Co-operative Dairies shares and for Kiwi shareholders to grow their milk solids production, they are required to purchase more shares to top up their holdings within the company’s Fair Value Share Standard policy.

“The product is available both to existing and new Bank of New Zealand customers who are Kiwi suppliers and has been designed in close association with Kiwi. Bank of New Zealand intends working with Global Dairy to offer a similar product to shareholders if and when the merger takes effect.”

Mr Thodey said that Bank of New Zealand has developed a reputation as a market leader and innovator within the rural sector during the 1990s and now is second in terms of market share after virtually having no presence in the sector in 1990.

“For example, in 1990 we had three agribusiness staff to service our rural lending portfolio nationwide, now we have 150.”

Mr Thodey said Bank of New Zealand holds in excess of a 25% share of the $13 billion rural lending market which totals about 45,000 commercial farmers across dairying, sheep and beef, horticulture and cropping.

“The bank is especially strong in the dairy industry with well over 30% of dairy farmers having a relationship with Bank of New Zealand,” said Mr Thodey.

The dairy industry contributes more than $12 billion to New Zealand’s $100 billion GDP.

Mr Thodey added that the new Farm First Dairy Share Loan package was linked to wholesale interest rates and will enable dairy farmers to grow their businesses profitably and provides them with an integrated solution that recognises their role as a raw material producer through to export marketer of value added products.

“The dairy industry represents New Zealand’s best example of a vertically integrated industry and its award winning track record for product innovation will ensure a secure future for all stakeholders in the industry.”

Kiwi suppliers should contact their local Bank of New Zealand agribusiness manager for further information. The product is available to all Kiwi shareholders and does not require them to shift their entire banking relationship to Bank of New Zealand.

* * * * *

Media backgrounder attached

Media Backgrounder

- One of the issues that the dairy industry had to address moving forward was the ability to offer fair entry and exit values for farmers seeking to enter (e.g. dairy conversion) or depart the dairy industry, noting that Kiwi and NZDG produce 95% of the total milk processed in NZ.

- To address this issue Kiwi Co-operative Dairies Ltd has introduced what it has described as a “Fair Value Share Standard” (FVSS). The broad objectives for Kiwi in this FVSS are as follows:

- Maintain the link between supply and share ownership (as the shares are the mechanism which provides the shareholder with the right to supply milk to Kiwi)

- Farmers to maintain 100% ownership of the co-operative

- To protect Kiwi in the event of a significant number of share surrenders

- Send the appropriate signals for farmers as to the price of entry for new milk

- Ensure exiting shareholders receive Fair Value for their investment in Kiwi

- Full details are contained in Kiwi’s document “A Fair Share” issued in March 2001 This policy recognises the changing nature of ownership of value in the dairy industry as a value added business and its aim to maximize returns to dairy farmers. Kiwi’s aim is for the industry to move from being purely about pay out to pay out and wealth creation.

- Under the policy, for all new milk from both conversions and existing supply, Kiwi shareholders are required to “pay” Fair Value - that is, subscribe for the relevant number of $1 shares for each kg milksolids of new milk at the Fair Value Share Standard applying at the commencement of the season during which the new milk is supplied. All milk will then share in the returns for that season, including any change in Fair Value.

- Using an example of a Kiwi supplier who had shares for the production of 100,000kg of milksolids and increased his production to 120,000kg, he will require an additional $80,000 in new shares under the FVSS of 4 : 1 (4 shares per 1kg milksolids supplied)

- Banks servicing the rural sector generally adhere to security values of up to 70% of the total asset value of land, up to 50% for livestock up to 50% for shares. Farm First Dairy Shares Loans will provide up to 100% on dairy company shares. This means that a farmer requiring $80,000 worth of additional shares will be able to borrow $80,000 instead of the usual $0-$40,000 under existing industry norms. NB Provision of debt is always dependent on a number of factors - the most important being the ability to service the loan obligations and the robustness of the cash flow of the business.

- The borrower has the option of a pay back period of up to 10 years and can fix an interest rate for the full term or use floating rates, both linked to wholesale rates.

- Under the loan agreement, BNZ will have first call on the supplier’s dairy cheque for funding of the Farm First Dairy Shares Loan which will require the farmer to sign a priority order as part of the loan agreement.

- The Farm First Dairy Shares Loan application process is considered to be easier than “traditional’ loan applications. This is due to the fact that the product is one of the best examples in the market of a true cash flow and production-based loan. This means that the loan is based on the level of milksolids produced, the milk cheque and the number of shares required.

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