But Fonterra's boss sees TAF as a unique opportunity, Andrea Fox writes.

Fonterra farmers appear underwhelmed at hoopla over the dairy giant's share trading among farmers (TAF) prospectus launch, with strong indications they will hold tight to their shares, which will force Fonterra to "top up" a $500 million Shareholders Fund pivotal to making the historic sharemarket entry work.

The countdown to Fonterra's sharemarket debut began yesterday, with the issue of the TAF prospectus, and November 5 named as the date listed units in a Fonterra Shareholders Fund will go on sale. Trading on the NZX is expected to start on November 30.

But while Fonterra chairman Sir Henry van der Heyden lauded the launch as "a unique opportunity" for the public to gain exposure to the financial performance of New Zealand's biggest company, dairy farmers are so far lukewarm about getting involved.

That is despite suggestions some would jump at the chance to sell the economic rights to their shares to the fund in exchange for cash as they struggle to make ends meet under a significantly lower Fonterra forecast this season and a current cost of milk production higher than their advance payments from the dairy company.

One large-scale corporate farmer who declined to be named said he would not be parting with any shares and he knew of no-one else in his "circle" of farmers who planned to.

"There are a lot of well-heeled farmers who are not going to release their shares."

Another farmer said farmers at a rural discussion group he attended this week indicated they were "going to hold onto their shares pretty tight, even though they are up against it".

Selling rights to their shares would not be enough to get struggling farmers "out of a hole" because they can only sell up to 7 per cent of their shareholding, both farmers said.

Federated Farmers Waikato president James Houghton believed farmers would only have an appetite for selling into the fund if the Fonterra share price went over $6. It is currently $4.52, after being discounted by 25 per cent in preparation for TAF.

Waikato farmer Dean Bailey said he would not be selling into the fund.

"It's not part of our business decisions at this time."

But Federated Farmers dairy chairman Willy Leferink was upbeat.

TAF could be the start of a highly innovative and exciting chapter in its history, he said. "Given debt pressures facing some farmers, selling down a percentage of their economic interest in Fonterra, no more than 7 per cent, could be attractive. It is an option that has never existed before and I think some farmers will take it up."

Fonterra unveiled two offers.

A "supply offer" invites farmer-shareholders to sell the economic rights to their shares at three different price ranges or at a final price, under an offer that opens on November 2 and closes on November 21.

The other is a "fund offer" to the public, farmers and "friends of Fonterra" including retired farmers, sharemilkers and permanent staff on both sides of the Tasman. There will be no public pool so public investment will be limited to clients of selected sharebroking firms and banks.

Units, derived from shares farmers sell into the $500m fund, are being offered at an indicative price of $4.60-$5.50, which values Fonterra at $7.4 billion to $8.7 billion. Units will be listed on the NZX and ASX. That offer opens on November 5. The final price will be announced on November 27 after a bookbuild in which sharebrokers and institutions submit bids for stock. Unit holders will receive dividends equal to those received by farmer shareholders, but cannot own shares or have voting rights.

That way Fonterra leaders have been able to assure farmers of continued 100 per cent ownership and control of the co-operative while attracting permanent capital for growth. Currently the company trades its own shares which its leaders say exposes it to shareholder runs on its balance sheet. Farmers who buy units can convert them to shares later.

Van der Heyden said if necessary the board would issue shares to achieve the mandated $500m minimum fund size.

He agreed there would be a dilutionary effect on earnings per share.

But even if the worst came to the worst and Fonterra had to provide $500m to get the fund working, dilution would be less than 1c on earnings per share in the 2013 financial year. The following year the effect would be corrected once the fund had made money.

Farmers contacted by Fairfax were not happy about the prospect of their dividends being diluted by a "top-up".

In the year to July 2013, Fonterra is forecasting a dividend of 32c a share, so the units will carry a gross dividend yield of 5.8 to 7 per cent, depending on the unit price.

Shareholders Fund board chairman John Shewan said although the units were not shares, their returns would depend on Fonterra's performance.

Van der Heyden said the bottom of the indicative unit price range of $4.60 was Fonterra's "line in the sand". If bids came in at a lower figure TAF would not go ahead, he said.

Given Fonterra's share price has been discounted to $4.52, this statement came as no surprise.

Leferink said TAF would enable Kiwis to be able to share the success of the dairy industry, which could build an understanding of what dairy farmers do.

"The number of external unit holders of course depends on the take-up of farmer-suppliers. If each farmer-supplier invested $50,000 that hits the $525 million upper limit set for the fund.

"That won't happen but we can depend on an exceptionally high level of industry interest. It is why I see potential for the greater use of ‘friendly capital' from retired farmers, sharemilkers and even Fonterra's own staff."

- © Fairfax NZ News