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Proposed law change opens Fonterra pricing to more scrutiny

Proposed law change opens Fonterra milk price to more scrutiny, heralds TAF

By Jonathan Underhill

March 28 (BusinessDesk) - Fonterra Cooperative Group's farm gate milk price will get greater public scrutiny under a bill that attempts to limit the dairy giant's ability to game the market and heralds its plan to introduce tradable shares.

The Dairy Industry Restructuring Amendment Bill was tabled in Parliament yesterday by Primary Industries Minister David Carter. Among changes to existing law, Fonterra will be required to disclose information on how it sets its milk price, a process that will be monitored by the Commerce Commission.

The bill “will oversee how Fonterra sets the price it pays its farmers, thereby ensuring a competitive and innovative dairy industry,” Carter said. Fonterra's dominance means the price it pays for milk at the farm gate "effectively becomes the default price that all dairy processors must pay to attract supply from farmers.”

Fonterra releases its first-half results tomorrow and is likely to use the opportunity to comment on the bill and also progress with TAF, which has been getting a mixed reception at farmer meetings around the country.

Fonterra Shareholders’ Council chairman , Simon Couper yesterday reserved judgment on the bill, pending a deeper reading of the 30-page document that would amend Fonterra's enabling legislation, the Dairy Industry Restructuring Act 2001.

The cooperative won a mandate from its farmers in 2009 to overhaul its capital structure which would see the creation of a farmer-only share market for trading Fonterra shares, known as TAF.

Farmers could also sell some of their shares into a fund, for cash and a voucher, and external investors would then be able to buy the rights to dividends from the shares. A second market would exist where the rights, or 'fund securities' could be traded. They wouldn't carry voting rights in Fonterra.

The plan envisages market makers who would buy and sell shares and ensure adequate liquidity.

Alongside the bill, the Ministry of Agriculture and Forestry released a regulatory impact statement on Fonterra's milk price setting, capital restructure and share valuation.

The RIS includes a section on consultation which notes that the majority of Fonterra farmers who commented on TAF weren't supportive of the proposal.

"This is largely due to concerns about a lack of information supplied by management and suspicions that farmers will no longer have 100 percent control of the cooperative," the MAF document says. "A number of farmers consider that another vote on TAF should be held."

The RIS says TAF is "a highly novel concept, which is likely to take some time before its potential could materialise."

Risks include the potential for TAF to be poorly designed, keeping institutional investors away from the fund and leaving the markets illiquid and unable to function in allowing farmers to buy and sell shares in a timely manner. It could also damage the reputation of New Zealand's capital markets.

If it works as hoped, the TAF system would deliver "deep, liquid, transparent, well informed and fungible markets for Fonterra shares" with the potential to be "an effective substitute to Fonterra issuing and redeeming its shares."

Listing the shares and fund securities on a registered exchange such as the NZX would bolster the transparency of Fonterra's milk-setting process because of the levels of disclosure required under the Securities Markets Act and the likelihood that financial analysts would add to the scrutiny.

Fonterra bases its milk price setting on what is called its Milk price Manual but until this was voluntarily disclosed last September there had been "a complete lack of transparency" in how it set the price. Without a legislative imperative, "Fonterra may choose to withdraw it at any time," the RIS says.


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