By Glenys Christian
Fonterra’s three new ways for farmers to share up to become full shareholders have been welcomed by Federated Farmers’ Sharemilkers Sub-section’s chairman, Richard McIntyre.
“Anything that provides flexibility will be regarded well and welcomed,” he said.
He is 50:50 sharemilking 450 cows near Levin, Horowhenua, and said young farmers would always stretch themselves to buy their first farm.
“So more flexibility with sharing up will give them comfort,” he said.
“Every little bit helps.”
Over the last several years when payouts were low young farmers had particularly struggled to buy their first property.
The new options, announced at Fonterra’s annual meeting in November, are directed not only at young farmers under financial pressure, but also at established farmers wanting to buy another farm and contemplating selling their shares to fund the purchase.
Its Southland/Otago regional head, Mark Robinson, said it was always looking at tools to make things easier and their development of the three new options had taken place over the last year.
“We live in a volatile environment,” he said.
“But this gives farmers more flexibility. The core of our shareholder base is fully shared up but these options assist those who want to join the co-op or buy another farm.”
The first of the tools is the Strike Price Contract (SPC). It will give farmers the flexibility to share up in seasons where the farmgate milk price is higher and so cashflows are boosted.
But when the price is lower, farmers aren’t required to buy shares and can instead put income into onfarm spending.
Fonterra believes the SPC will also provide greater certainty for banks looking to lend on positive cashflows.
McIntyre said he believed banks would be more confident about lending to farmers based on the fact that with this option they would only need to buy more shares in medium and high-payout years, depending on where the strike price is set.
Farmers taking part in the scheme will need to buy a minimum of 20% of their offer quantity by the compliance date in their first year. Then they will only need to buy shares when the milk price is above the strike price, which will be set at $5.25 for contracts starting in the 2018/19 season. If the farmgate milk price goes above the strike price, they will be required to allocate 50% of the amount above the strike price to buy shares by the next compliance date. They can use the remaining 50% for any purpose they like such as capital spending or to maintain cashflow. If the farmgate milk price falls below the strike price, farmers don’t have to buy any shares.
An SPC will last for a minimum of six years and if the famer is not fully share compliant by that time they will need to buy at least one third of the remaining shares they need in each of the next three years.
Robinson said initial farmer feedback to this scheme had been very positive.
Any shareholder can sign a strike price contract so long as they are increasing milk production by a minimum of 10,000 kilograms of milksolids (MS) above current production.
The second new option is the Contract Fee for Units scheme which will help both new and existing farmers supplying milk to Fonterra under one of its Share Up Over Time contracts buy shares. Here the co-op will transfer an amount equal to its five cents per kg MS contract fee, after tax, to a trust which will buy units in the Fonterra Shareholders Fund regularly, to match the kg MS supplied by the farmer.
When that farmer needs to share up the trust will give them the units it’s bought to help them meet their share up requirements. This method of transferring the fee into units will also apply to strike price contracts.
The third tool allows farmers to buy shares with their Farm Source reward dollars they build up through shopping at these stores. Robinson said significant amounts of money were held here with reward dollars earned growing from $4.5 million a few years ago to last year totalling $17m. This initiative would not only help existing suppliers fully share up but also make it easier for farms growing their milk supply to maintain share compliance. And it’s hoped it will also attract new farmers to the co-op.
There will be a one to two-week window between the time farmers receive their measurement statement in June and December 1 when they can use a minimum of $500 worth of the Farm Source rewards to buy the shares they require. Fonterra will receive payment from Farm Source and then will issue the new shares to farmers.
