Attached is a straight forward newsletter to you all about the Dividend Payments and really, it simply gives you food for thought before completing your election forms by 28 February. We are starting to hear a few questions from you all so this may fill some gaps.
Joanna and Phil
Fonterra shareholders and sharemilkers – Implications of changes in capital structure and resulting payments
Following the recent successful vote to change the capital structure of Fonterra, there are now some important decisions that need to be made by farm owners with sharemilkers.
While some of these have been hinted at, the implications of the decisions may not be fully realised by all parties involved.
Some history to begin with
Currently all milk producers receive a payment from Fonterra for milk solids on a monthly basis, based on milk solids produced, together with a “Value Add” payment towards the end of the season, again based on milk solids produced.
The Value Add payment has, however, effectively been the distribution of profit made on the add-on products produced by Fonterra.
At the moment shareholders (farm owners) provide instructions to Fonterra about how the payments for milk are to be split between themselves and their sharemilker, and this instruction is applied to both the milk payment and the value add payment – so for example, historically in the case of a 50/50 contract, both the payments for milk and the value add payments would be split 50/50. There may be separate instructions in relation to capacity adjustments.
The new capital structure
As a result of the capital structure changes that have taken place as a result of the recent majority vote by farm owners on 18 November 2009, there is now a clearer distinction between the amount paid for milk farmers supply to Fonterra and the dividend paid on shares they have invested in Fonterra. The dividends will be paid on the number of shares held by shareholders at 31 March and 31 May each year and not on the basis of milk production.
There is also the ability for farm owners to hold shares in Fonterra up to 120% of their recent or expected production. This has led to the terms “wet” shares (ie those supported by production) and “dry” shares (ie those not supported by production).
The dividend payment
By law the dividend payment must be paid in it’s entirety to the shareholder – ie the farm owner (in most cases). There is no ability for instructions to be given to Fonterra to split this payment with the sharemilker.
There is currently legislation before parliament, which means that unlike most dividends one receives, the dividends received from Fonterra will not be subject to resident withholding tax nor have imputation credits attached. Also, there will be no GST paid on the dividend.
The dividend will be paid based on the number of shares owned on the Dividend Record Date. These dates have been determined as 31 March and 31 May. Payments will be made on 20 April and 20 October following these Dividend Record Dates. The dividend will be paid based on the total shares owned on that date, not on the basis of the production.
Other implications for sharemilkers
Sharemilkers with existing contracts are legally entitled to continue receiving the equivalent portion of the payout they currently receive on all payments from Fonterra, including the dividend portion. For example a 50:50 sharemilker currently receiving 50% of all payments from Fonterra will continue to receive 50% of all payments (for production shares), even though the value-added portion of the payout has now been changed to a dividend payment. Sharemilkers have no entitlement to any payments related to "dry" shares.
Sharemilkers with current contracts that have a clause(s) that states payment changes that occur are not to adversely affect either party are legally protected, so any changes cannot adversely affect a sharemilker's income – this includes the Federated Farmers' agreements. Sharemilkers should be encouraged to seek legal advice to clarify individual contractual details where they feel this is necessary.
Fonterra has realised that there are concerns around the inability to split the dividend payment between the farm owner and the sharemilker. In recognition of this they have introduced a Dividend Related Payment Adjustment (DRPA). This will allow shareholders to adjust the milk payment allocation to reflect the current contractual obligations.
All shareholders with sharemilkers have been asked to complete a DRPA election before 28 February to instruct Fonterra in regard to any DRPA. There are several options that need to be considered:
- Make a payment adjustment based on all shares owned (wet and dry)
- Make a payment adjustment based on only shares related to production (wet shares only)
- Make no adjustment.
The adjustment will be made at the same time as the dividend payment and will be an adjustment to the milk payment for both the shareholder and the sharemilker.
This is not an issue where a contract exists that applies a certain dollar value per kilo of milk solids.
A shareholder owns 80,000 shares and has a 50/50 sharemilker. On 20 April 2010 he is entitled to receive $40,000 plus GST ($45,000) for milk plus a dividend payment of $20,000 – a total, including GST, of $65,000.
On 20 April 2010 the sharemilker is entitled to receive $40,000 plus GST for milk – a total, including GST, of $45,000.
The shareholder has elected that a DRPA be made in relation to the 80,000 shares owned by him and that a 50% adjustment would be made.
The shareholder would therefore receive $10,000 plus GST less in milk – so a total of $30,000 plus GST ($33,750) – ie $40,000 minus $10,000 plus GST. Including the dividend, he would therefore receive $53,750.
The sharemilker would receive a total of $50,000 plus GST – ie $40,000 plus $10,000 plus GST for milk – a total of $56,250.
Increases and decreases in production
There are complications where there are increases and decreases in production. The milk price will be paid based on production, but the dividend (and therefore the DRPA) will be based on the number of shares held at the relevant dates referred to earlier. So if production is higher than the number of shares owned at the beginning of the season, the DRPA to the sharemilker will be less than as if it had been based on actual production. Likewise, if production decreases, the sharemilker will get more and the shareholder less.
What needs to happen now?
Farm owners with sharemilkers need to complete the DRPA election before 28 February 2010. These have been posted to all shareholders and are also available on the Fonterra website.
Fonterra have indicated that they will be actively monitoring the return of these forms.
At this stage we are not aware of any formal communication having taken place between Fonterra and affected sharemilkers; we understand that this is still to happen.
All sharemilkers and farm owners need to renegotiate their existing contracts and decide how this issue is to be dealt with.
Rural law commentators are advocating that the only option that does not unfairly prejudice one party over the other is for farm owners to share the dividend payment on "wet" shares with their sharemilkers.
Sharemilking contracts in the future
When negotiating sharemilking contracts from now on, there are a number of items that now need to be considered in the contract:
- Milk price
- Capacity adjustment
- Dividend payment on wet shares
- Dividend payment on dry shares
Our thoughts of the Dividend Related Payment Adjustment terms
There are two options listed for the 2009/2010 season onwards,
1. to split the payment to the sharemilker or
2. to not make any payment to the sharemilker
What could be considered is the dividend is paid all to the shareholder and a calculation made based on production for the payment required to the sharemilker. This will depend, of course, on what is stipulated in the sharemilker contracts.
We hope this helps explain the area further however please contact us should you require any further assistance.