Gap in price between Fonterra farmer shares and units drawing attention

There's a big gap between the price of Fonterra farmer shares and listed investor units in the dairy company.

Fonterra chairman Peter McBride says it’s ultimately the dairy heavyweight’s farmer-owners who determine the value of their shares, as the price of Fonterra farmer shares continues to be significantly weaker than that of the company’s listed units.

“In the restricted market, where only farmers can buy and sell to each other, it is ultimately farmers that will determine the value of the shares,” he said.

McBride was responding to an observation by Northington Partners in an analysis of Fonterra’s 2024 half-year financial performance that the price of farmer shares was, at the time, 35 per cent below the price of Fonterra Shareholders’ Fund units, relative to an average discount of 17 per cent since May 2021.

May 2021 was when Fonterra, New Zealand’s biggest business, announced a capital restructure.

On Friday, farmer-owned (Fonterra Co-operative Group, FCG)) shares closed at $2.38 on the NZX, compared to the $3.58 price of a unit in the Fonterra Shareholders’ Fund (FSF).

Fonterra is wholly owned by its farmer-shareholders. The dividend-carrying, non-voting units were created to offer outsiders the opportunity to invest in Fonterra, the world’s sixth-largest dairy company by revenue.

Northington, in an independent analysis of Fonterra’s half-year performance commissioned by Fonterra’s farmer watchdog council, noted “ongoing weakness” in the Fonterra farmers’ market for shares, relative to the price of units. The comment was carried in the council’s latest quarterly update to farmer-shareholders.

“This weakness has extended into the current period with the market capitalisation of Fonterra (based on current FCG price) now significantly below the book value of net assets. The price of Fonterra shares is now 35 per cent below the price of fund units, relative to an average discount of 17 per cent since May 2021,” Northington said.

John Stevenson, chairman of the council, which is elected annually by farmers to monitor their interests in Fonterra, said the council was monitoring the continuing price gap.

“When we’ve asked Fonterra’s auditors [for advice] on this, they have commented it’s not of concern so long as the valuation of the business is robust and Fonterra can support the carrying value of its assets.

“We get regular feedback [from farmers] on the share price which we pass back to the [Fonterra] board. The gap is something we’ll continue to monitor and question the auditors on,” Stevenson said.

In response to Herald questions, board chairman McBride said he could not comment on the relative value of the shares and the units as the cooperative has a share buyback programme in the market.

“[Comment] could be perceived as an indication of our future intentions in the market, or financial advice,” McBride said.

Fonterra chairman Peter McBride.

“We put a huge amount of time and energy into consulting with our farmers on the changes to capital structure.

“During those conversations, we were very clear that a lower share price was a likely consequence of moving to a restricted market. It is clearly noted in the formal proposals - including the Notice of Special Meeting. More than 85 per cent of total farmer votes were in support of the change. The Co-operative Council was more than 90 per cent in support.

“More recently, there has been an impact on share price following our capital return. But over time, we expect the price will reflect the co-op’s financial performance and the value farmers see in that.

“In the restricted market, where only farmers can buy and sell to each other, it is ultimately farmers that will determine the value of the shares.”

McBride said farmers’ cost of capital, which was normally higher than that of other investors, was a key part of how farmers would assess value, and was “potentially one of the reasons why you see the divergence between the share price and unit price at the moment”.

“There is also potentially a liquidity discount in the restricted sharemarket, which we have looked to address through our market-maker arrangements.

“The other driver is likely cashflow on farms, which are extremely tight as farmers deal with high inflation on most of our input costs,” McBride said.

Jarden head of research Arie Dekker, asked to comment on the share price gap, said: “I continue to see an opportunity for value accretion through the buyback of FCG [Fonterra Co-operative Group] shares at current levels”.

“With FCG shares trading where they are, we see this use of capital as an important value reference point against other alternative uses of capital - particularly in non-core areas.

“That being said, we also expect that execution of the [business] strategy, returning further capital through non-core divestment and delivering consistent profit results will see the value gap close over time.”

Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.