Monday, June 25, 2012

Pop quiz, what happens to CO-OP members when they stop being a CO-OP?

The board and management of Fonterra have pulled off the impossible today and convinced the Turkeys to vote for an early Xmas.
I have sat through a few Fonterra meetings over the last year. I have heard all the reasons for TAF and none of the reasons to say no to TAF.

Here is how this is going to play out for Mr and Mrs Dairy Farmer;
Your farm gate price will drop. While this will be good for Fonterras domestic rivals and ultimately the domestic consumer it will be bad for young farmers and small farmers alike.
You see to create sustained demand for the unit trusts and dry shares the price of them will need to rise. And the only way they will sustain growth in pricing is to pay a bigger and bigger dividend. And that increase in dividend can only come from the farm gate price.

Moving away from a co-op model has failed the grower in every instance since Pontius was at flight school. This will be the same.

Fonterra sold this by claiming redemption risk was a scary monster. This is bullshit. Simply pulling back on the payout in times of stress covers this and they have simply moved the redemption risk to the farmers balance sheet and off theirs.
Likewise the access to capital argument, making this argument while interest rates are at historic lows is ludicrous.

And now why will it be bad for the young and small?
Marginal farms will sell down 30% of their shares  to the big farms (if the bank who no doubt holds a security over them will allow it). And as the share price goes up they will not be able to buy them back. Allowing new farms to buy the shares in years three, four and five sounds good but how much will they cost?
A lot more because the demand side pressure will force ever increasing dividends which will come out of the farm gate price which they need to buy the shares.

Fonterra are claiming in excess of 66% voted yes. That might be the case in terms of milk solids but I would like to see a farmer count.

5 comments:

Adolf Fiinkensein said...

Hello Barnsley. Welcome back.

A few questions.

1 "You see to create sustained demand for the unit trusts and dry shares the price of them will need to rise." You'll need to explain why there is a need for 'sustained ddemand.'

2 "Moving away from a co-op model has failed the grower" You'll need to explain how one farmewr selling his shares to another farmer is 'moving away from a co-op model'

3 "the demand side pressure will force ever increasing dividends" Again you'll need to explain how demand for shares will somehow 'force' Fonterra to increase dividends.

At eh end of the day this is simply a way for farmers to substitute equity finance for debt finance which, no doubt, the trading banks will look upon with disfavour.

Barnsley Bill said...

Hi Adolf.
If the demand is low it will be seen as a failure. Increasing the dividend will see demand increase, which will see the price rise, which will see the dividend need to to increase to see the demand increase.. You see where this is going?
2. Name a co-op that has changed from co-op to anything else that has not seen the grower shareholders get it in the chook?
3. See point 1. If the dividend payout is unattractive share/unit prices will fall = failure. The only way to keep demand/price up is to rob the farm gate price and put it in the dividends.

Your last comment.. I leave the bank next week, back off to Auck again. So no dog in this fight at all. The banks are staggeringly relaxed about this. At every level.

Adolf Fiinkensein said...

being 'seen as a failure' is pretty airy fairy stuff there, Barnsley.

Is that all you've got?

But of course Fonterra has NOT changed from being a Co-op. To do so it would have to relinquish control of a majority of shares to non farmer members. Pray tell, how is this so in this case?

If one were to adopt your logic, one would join Labour and the Greens in their campaign against the sale of minority share holdings in a few power generation companies.

Barnsley Bill said...

They will become a farmer owned business. This is different from a co-op. It will make it harder for new young entrants and will ultimately see farms merge into mega conglomerates. Now I am not against that but I am against the spin and utter bullshit they have spouted to get this across the line.
The campaigning directed towards the larger producers would shame the olympic hosting rights shenanigans that go on every four years.

barry said...

One of the early 20th century US prsidents saved US farmers from themslves.

After the depression the US farmers felt that they were getting a raw deal and had decided to form a sellers union. When the president heard of this he decided to act. He wanted properous US farmers - he didnt want a suppliers union because such unions always manage to alienate their customers.

He said "Farmers will vote for poverty and I dont want poor farmers in this country". What meant was that when given an option farmers had always voted for the option that gave them the lowest return.

I suspect that TAF will prove again that farmers still vote for the lowest return