Westland Dairy has no plans to follow Fonterra's lead

Westland Milk Products has no plans to follow Fonterra and open up its business to private investors, despite what appears to be an voracious appetite for protein-related assets, chief executive Rod Quin said today.

The Fonterra Shareholders Fund, which gives investors access to the co-operative's dividend flow, had an explosive debut on the share market last week, with the highly-sought units trading initially at a 21 per cent premium to their issue price. Today the units were at $6.80 - up 23.6 per cent. The retail phase of the offer was understood to be 10 times oversubscribed.

While many in the dairy cooperative world would have taken special notice of Fonterra's unique fund, Quin said in an interview with APNZ that Westland - one of New Zealand's top 100 businesses with turnover over $530 million - had no plans to follow suit.

The cooperative will however set up a review of its constitution, which has not changed in 10 years.

Westland takes more milk from Canterbury farmers these days, and the company now has more of an added value strategy, so a change in the constitution could reflect that, Quin said.

But he ruled out far-reaching changes, as undertaken by Westland's far larger counterpart.

"No, we will not go down the (Fonterra) fair value share route," he said.

As it stands, Westland shares have a nominal set price of price of $1.50 each. Quin said there may be a recommendation that could see the price increase, in time, to $2 or $2.50.

"But it will be a consistent share price, and not a 'fair value' share price," he said.

Westland has a name for making quality milk powder and in its quest for high value, has chosen to take the infant formula route. By February next year, the company's Hokitika plant will have been converted to produce formula on a large scale.

When Fonterra was being formed in 2001, most cooperatives opted to become part of the dairy giant, which also took in the old Dairy Board.

But Westland - which processes just under 10 per cent of New Zealand's total milk supply - and Morrinsville-based Tatua, opted to go it alone.

The driving force behind Fonterra's fund and Trading Among Farmers was its redemption risk - when the cooperative has to pay out farmers when they decide to exit the industry.

Fonterra's redemption risk proved to be a problem when a large number of farmers chose to opt out, costing about $700m, at the height of the global financial crisis.

Quin said Westland was "strongly entrenched" in the cooperative principle.

"There is quite an understanding that $1.50, which has been in place for 10 years, has provided a low barrier to supply, but it means the value of the farm is reflected in the land of the farm, not necessarily in the value of the business," he said. "And that's a different philosophy and quite different to what Fonterra started doing 2001," he said.

As it stands, farmers who opt out of Westland are paid out at $1.50 a share. If a large number of farmers opt out at the same time Westland can retain capital for up to five years, so the potential for a "run" on its shares is limited.

Quin said Trading Among Farmers had been a long and difficult journey for Fonterra. "But at the same time, I admire the fact that there is innovation in the industry and that this is something of a world first," he said.

"Many other cooperatives will reflect on capital raising in a different way now, but it's not something that immediately grabs us as a being such a good idea," he said.

Looking ahead, Quin said he expects 2012-13 to be a tough year for dairy farmers.

Milk powder prices are improving, but the New Zealand dollar has remained stubbornly high at US82c. And Quin said it did not look like the currency was going to fall any time soon.


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