Dairy equities simplified

Much has been published about Dairy Equities and it is not that easy to understand. We as farmers like things simple. Edward deBono wrote a book called "Simple".

So how does it all look, when put simply?

Dairy Equities purchase the "Beneficial Ownership" of your shares. That means that we still own the legal interest in the shares. We can still vote, have the right to supply Fonterra and we keep the Commodity Milk Price as our income stream.

Our neighbours will not know that we have sold our "Beneficial Ownership" to somebody else, so from the outside it is just business as usual, but we will hold the shares.

So how much do we get for our milk if Dairy Equities own the "Beneficial Rights" to our shares. Effectively, there are two parts to our income:
    The Commodity Milk Price (CMP)
    The Value Added Component (VAC).
We will get the CMP, which is the payment for processing the bulk milk into commodities. For the last season, that would have been $3.67. The VAC goes to the Dairy Equities, who owns the Beneficial Rights to our shares. On last year's pay-out, they would have received $0.48.

Now our income has dropped, but we have cashed up our shares and sold the rights to Dairy Equities Limited. In doing so, we have been able to sell our shares for cash, hence reducing debt, or being able to reinvest that cash back into the farm or other investments.

Doing the maths, $0.48 over a share price of $6.56 per fair value share is a return of 7.3%.

Now if our costs of debt or cost of funds is 9%, then we win by 1.7% over the value of the shares, so in the short run we are probably better off.

So what's in it for Dairy Equities Limited? They receive a 7.3% return on their initial investment. They also receive the VAC part of the pay-out. If that part increases in return, they get a bigger return and the opposite also applies. If the value of the shares rises, then that increase goes to Dairy Equities Limited and not to us. The opposite for this situation applies too of course.

Now there will be a SWAP Agreement between Dairy Equities Limited and us, which will set out the "who", "what", "where" and "why". It will also cover increases in production etc.

From our Bankers' point of view, they will have their security reduced if we sell, but their debt or exposure should be reduced accordingly. Most Banks are quite happy with the Dairy Equities Limited proposals. If we sell our farms, then the proceeds from the sale of the shares would go to Dairy Equities Limited, not to us.

If we want to sell our shares to Dairy Equities Limited but then decide to repurchase them, they have a fee (or discourager) of 5% of the value, which is understandable enough.

In summary, the sale of our shares (Beneficial Rights) to Dairy Equities Limited does have some clear benefits. It will suit some of us and not others.

If we are considering selling, then discussions with well informed and suitably qualifies people is essential. There are a number of issues and considerations for us to decide upon.


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