Fonterra backs away from Dairy Equity

Fonterra has moved to formally distance itself from the Dairy Equity scheme that offers investors the opportunity to gain a beneficial interest in the co-op's shares.

A Fonterra spokesman said the co-op's statement yesterday was to put its position on public record.

But it also follows questions about the merits of farmers getting involved.

Dairy Equity is raising $100 million to pay farmers cash in return for their giving investors a beneficial interest in the value-added returns and capital gains from their Fonterra shares.

The float officially closes on September 8 but has already been over-subscribed.

Some farmers have been sceptical about the offer, saying they would prefer to borrow from the bank if they needed funds.

However, Dairy Equity says its scheme may well prove attractive to certain types of farmers.

Fonterra's statement said the co-op was not associated with Dairy Equity and had not helped prepare its prospectus.

Dairy Equity's scheme could give it a significant "de facto" stake in Fonterra, especially if more floats were held.

But Fonterra stressed that, when making decisions, its board would continue to act in the best interests of all shareholders and not take account of the interests of Dairy Equity or its stakeholders.

Neil Craig, executive chairman of ABN Amro Craigs - the joint promoter of the Dairy Equity float - said he was relaxed about Fonterra's statement, which he described as a logical stating of its position.

Federated Farmers, meanwhile, issued a statement urging dairy farmers to get independent financial advice before taking part in Dairy Equity's scheme.

Lachlan McKenzie, vice-chairman of Dairy Farmers of New Zealand - which has raised questions about the effective cost of money under the scheme - said farmers needed to carefully weigh up the pros and cons before entering into an arrangement with Dairy Equity.

McKenzie said one of the factors farmers must consider was whether it might be better to borrow against their Fonterra shares. Craig said McKenzie's advice was also logical.

Geoff Taylor, managing director of Dairy Equity's management company, agreed bank borrowing may be better for some farmers, rather than getting involved with his company's scheme.

"It really is a capital management product rather than competing with debt," he said yesterday.

It has previously been pointed out that the value-added portion of Fonterra's payout last season was 48c/kg of milk solids and that it could rise this season.

Forgoing 48c/kg per share to Dairy Equity - which would pay $6.56 a share in the first instance - meant farmers would effectively pay 7.3 per cent for the money they would receive and more if the value-added portion rose.