Fonterra hits pause button on equity trust scheme; UBS walks

Fonterra Co-operative Group [NZX: FCG] has put on hold its plans to develop an Equity Partnership Trust that would have given its 10,500 farmer suppliers access to investor capital to help them with the compulsory purchase of Fonterra shares when they increase milk production.

Chief financial officer Lukas Paravicini said the decision to shelve the trust proposal for now was a consequence of UBS deciding to end the advisory role that began late last year, for reasons unrelated to the trust itself, as well as volatility in dairy and equity markets.

“These two factors mean that it is appropriate to hit the pause button,” he said. “We will take the time needed to review the structure of the proposed trust and its implementation as market conditions unfold.”

The world's biggest dairy exporter had sought feedback from 150 farmers in a series of focus groups around the country on the idea, which was first mooted in September last year with the launch of its Farm Source brand. Fonterra said they were generally supportive of the idea and understood the reasons for it being put on hold. 

Given the current dire prospects for a second season of low dairy payouts, there’s likely to be a number of farmers looking for more equity to assist with the requirement to "share up", said Federated Farmers dairy chairman Andrew Hoggard.

Fonterra farmers have to hold one Fonterra share for every kilogram of milksolids supplied each season, in good seasons and bad, and there have been concerns growing milk production would mean some suppliers will have to borrow to meet their obligations.

The proposed trust would have allowed farmers to partner with global investors, who would take a minority stake in their dairy farms.

Mr Hoggard said no farmers appeared violently opposed to the idea at the focus group meetings he attended, though there were some concerns whether the good intentions of the trust would be met in terms of giving a helping hand to younger, more indebted farmers.

Mr Paravicini has previously said the trust was intended to complement, rather than replace, other forms of debt and equity funding and was another tool in the toolbox.

A discussion document released earlier this year said the trust could reduce cashflow risks for farmers from big swings in milk prices, which have seen massive drops in prices this year.

The document said the trust would be a partner that would invest in farming operations, normally through a minority stake, but it also said it may be helpful at times for the trust to hold a majority stake for a while to allow shareholders to exit and enter.

Farmers would still have been left in control of their farms and voting on Fonterra shares and dividends would have remained with the farmers, not investors.  

(BusinessDesk)