Warning for Fonterra shareholders

A shareholders risked being financially locked into the co-operative if they agreed to allow share trading among themselves, the chairman of Open Country Dairy has warned.

Laurie Margrain said allowing the trading of shares between shareholders rather than requiring Fonterra to redeem the value of those shares, as at present, meant the value of the shares could fall because of the limited buyer's market.

"If Fonterra is no longer required to accept supply when it is requested, or to redeem the shares of farmers who wish to exit, farmers will become economically locked into the co-operative."

Mr Margrain said he was not politicking.

He supported Fonterra recapitalising and he recognised the importance of the company to the economy.

"We're just drawing attention to any changes in open entry-exit [which] will, in effect, reduce the capacity to have competition in the industry."

But he had fundamental concerns, beause his and other new dairy companies existed only because the Dairy Industry Restructuring Act (DIRA) had created a vehicle for competition.

"An essential part of DIRA is open entry and exit, with farmers redeeming their shares in full and at the prescribed value," he said in an interview.

"Without that position there wouldn't have been any competition because all we would get is 50 million litres a year [of milk from Fonterra] guaranteed under DIRA, and if farmers cannot redeem their shares, then they are locked into Fonterra."

Fonterra chairman Sir Henry van der Heyden responded that open entry and exit would be assured under the proposal, saying it was a key principle of the foundation of the company and was not about to change.

"It is inconceivable to think that anyone would suggest otherwise. . . Our farmers will always be able to come and go as they please and be able to buy and sell their shares."

Mr Margrain said Sir Henry did not say whether those shares would be redeemed at full value and he believed the share value would fall due to the restricted market.

Open Country Dairy has three plants - two in the North Island and one near Bluff - which Mr Margrain said were full to capacity.

High land prices and limited farm conversion opportunities meant the company's Waikato plant relied on farmers shifting supply from Fonterra.

Farmers shifting their supply and some farm conversions in the Manawatu and Taranaki largely accounted for milk flows to its Wanganui plant, while milk for its Awarua plant came mostly from farm conversions in Southland and Otago.

He accepted Fonterra shareholders' rejection of a public float of part of the company had limited its options, and he said having wet and dry shares had helped raise $271 million.

A further 59 farmers surrendering 1.6 million shares had cost it $7.3 million.

He was also concerned at comments from Parliament, indicating DIRA would be ameneded if Fonterra required it.

This would reduce competition, he said.

Fonterra shareholders have already approved two aspects of its capital restructuring: allowing farmers to hold shares equivalent to 120% of their milk production and restricting the share value to reflect the fact only farmers can hold them.

The third stage, allowing shareholders to trade shares among themselves, will be voted on this year.