Sceptical farmers still prefer bank loans

Some dairy farmers are questioning the merits of unlocking capital tied up in Fonterra through the new Dairy Equity scheme, saying suppliers might be better off borrowing money from the bank if they need cash.

Dairy Equity agrees more debt will suit some but says its product could be very attractive for older farmers and corporates wanting to stick to their pastoral farming "knitting".

The dairy farmers' scepticism bears out earlier comments from Fonterra that the dairy sector is not facing constraints on being able to raise capital for expansion.

Dairy Farmers of New Zealand chairman Frank Brenmuhl said "there's been very little interest expressed" by farmers he had talked to about Dairy Equity recently.

The Dairy Equity scheme - which is raising $100 million in a public float - will involve farmers getting cash in exchange for giving investors beneficial interest over the value-added part of their annual payout and the capital gains in their Fonterra shares.

But Brenmuhl said farmers he had talked to had suggested that "if they needed to raise equity on their shares they would prefer to go to the bank".

He noted the value-added portion of payout for last season was 48c/kg of milk solids. That could go up to as much as 58c/kg this season.

Forgoing 48c/kg to Dairy Equity investors - who would pay them $6.56 for their shares in the first instance - means farmers could effectively pay 7.3 per cent "interest" for the money or more if the value-added portion rose. On top of that they would forfeit any capital gains, meaning the money could prove even more expensive.

"Farmers are relatively astute ... and if they need to raise capital this is one way they could do it but it's not the only way. I would expect them to have a bit of a look and see what their options are."

In June, the Business Herald reported that Fonterra was neutral about Dairy Equity's scheme but that strategy and growth director Graham Stuart was lukewarm on a suggestion the fund could be a way of unlocking capital to pay for industry expansion.

Existing financing arrangements had put more than $500 million into Fonterra shares since the co-op was formed and production had grown consistently. "Those aren't the sort of things you'd expect in a capital constrained environment," Stuart said.

However, Geoff Taylor, managing director of Dairy Equity's management company, said the response to the scheme was very encouraging.

Securities regulations meant no farmer could be signed up until after the float formally closed next month.

It would be "too good to be true" to expect that $100 million worth of shares were ready to be signed up as soon as the float closed.

But Taylor expected Dairy Equity would be in a position to make a positive announcement at that time.

He accepted farmers looking at the Dairy Equity scheme on a pure cost of money basis could prefer to raise debt more traditionally.

"For most people that are just comparing debt against [us] they are more likely to stick with debt as the traditional form of finance - got no argument with that."

However, the Dairy Equity scheme could have strong advantages for farmers looking to redeem capital for themselves or family without having to borrow or sell the farm.

Larger farms who wanted their capital employed in traditional pastoral farming rather than having it "upstreamed" into Fonterra's growth strategies might also find the scheme attractive, Taylor said.