Fonterra shares switch ups the

FONTERRA'S MOVES towards tradeable shares will shift risk off the giant co-operative's books, but could make it harder for farmers to borrow as banks scrutinise the kinds of security they can offer.

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According to consultant James Morrison, Fonterra's share changes, given the nod by farmers around the country in July, are effectively a debt for equity swap. This was done to protect the co-op from redemption risk - the risk that when farm production goes down or farmers leave the co-op that Fonterra has to buy out all or a portion of their shares - and broader farm debt, he said.

Morrison argues that co-operatives are essentially vertically integrated, so when members have debt, co-ops have debt. "Fonterra chose to do it by moving away from the co-op model and that will flow into the banking sector," Morrison said. That means farmers who have been able to borrow using their existing co-op shares as security may find that more difficult in future, he said.

"For any new [farm] conversions, I think banks will apply different rules. I don't know whether banks have thought about it. It's a work in progress."

Keith Woodford, a professor of farm management and agribusiness at Lincoln University, agrees Fonterra is transferring some of its risk from the co-op's balance sheet to farmers. "Fonterra is working through the issues with caution, but there's no doubt that it does transfer risk," said Woodford.

"You can't get away from that."

However, Fonterra, while conceding that there is such a risk transfer, argues that its members are part of the co- operative. The changes have reduced the overall risk farmers face as members.

CFO Jonathan Mason said farmers who stay in a co-op can end up subsidising farmers who leave. The new share structure, he said, delivers a reduction of risk for members from the farm gate and through the distribution chain that they own as members.

"There's an improvement of risk overall," he said. Mason said bankers see the new structure as reducing risk by broadening the funding options available to farmers.

Tony Arthur, BNZ's head of agribusiness, said shares are factored into the security on farm loans on the basis of face value and any economic income derived from the shares. He said Fonterra is working with banks to ensure vivienne westwood the shift to tradeable shares is transparent.

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"We are talking openly about what effect the sale of any economic right has on security," he said. "As long as the security is in good shape there's no concern, but if a business comes under pressure we need to look at it closely to ensure security is there."

With dairy prices falling over the last four months and with some farms still carrying high levels of debt, it seems inevitable that some will be coming under pressure. Morrison said farmers had benefited with high dairy prices over the last couple of years, but this was more serendipity than the result of careful management.

Farmers get in trouble usually when a number of factors impact on farm performance, Woodford said. This can be when high levels of debt collide with a drought or a wet season to reduce production.

However, farmers have worked hard since the back end of 2008 on reducing costs and on improving their capital structures, BNZ's Arthur said.

Fonterra's Mason said farmers and banks are mChristian Louboutin Shoes
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