NZ's Fonterra proposes farmer share-trading scheme

WELLINGTON, April 7 (Reuters) - New Zealand's largest company, dairy co-operative Fonterra, proposed that farmer shareholders buy and sell shares among themselves as part of measures to strengthen its balance sheet.

Fonterra is asking its 10,500 farmers to trade shares in the co-operative amongst themselves, ensuring farmer control while allowing for a fund to provide limited public investment. Fonterra has long cited redemption risk, where capital flows in and out of the balance sheet each year as farmers purchase or redeem shares, as a factor holding back its development. Chairman Henry van der Heyden said the move would make the co-operative financially stronger and improve its ability to invest in consumer products businesses.

"It would make the co-operative better placed to grow returns not just for today's farmer shareholders, but for generations to come," van der Heyden said in a statement.

Fonterra controls about a third of the world's dairy exports, and has annual sales of around NZ$17 billion, generating more than 7 percent of New Zealand's gross domestic product.

Farmers in 2008 rejected a a proposal to partially-list parts of the co-operative's operations in a float that might have raised as much as NZ$2 billion.

The latest proposal includes establishing a trading platform, with measures to guarantee liquidity and reduce price fluctuations.

A Fonterra shareholders' fund would be established to help farmers buy or retain shares they might otherwise have to sell.

The fund would raise money by selling investment units to institutional and retail investors, providing an opportunity for public exposure to the economically crucial dairy sector, of which Fonterra accounts for almost 95 percent.

Van der Heyden said the plan would also offer protection against strongly capitalised or subsidised offshore investors entering New Zealand and paying unsustainably high prices for milk to get a foothold.

"In such an event, Fonterra could face considerable redemptions - putting our balance sheet under potentially significant financial stress," he said.

The first step in its revised capital restructure took place in January, when Fonterra raised NZ$271 million by selling "dry shares" to farmers, allowing them to buy up to 20 percent more shares than their milk production would allow.

Fonterra has said it would seek feedback from farmers before deciding whether to put the proposal to a full vote, which would need 75 percent support of voting shareholders. (Reporting by Adrian Bathgate)