After an extensive consultation process, Fonterra has announced the formation of its new Equity Partners Trust, which is on schedule to make its first investments in October of this year.
In November 2014, Fonterra began reaching out to gauge the interest in a proposed equity trust that would invest, usually at a minority level, in the farming operations of its members in Australia and New Zealand, while giving investors the opportunity to divest across farming systems in the two countries, and gain exposure to the dairy sector.
The trust will be structured as an open-ended, independently managed fund, targeting commitments from sovereign wealth funds and pension funds seeking to gain exposure in land and dairy farms through a farm-owning equity.
The fund is designed to help the Australian dairy industry reverse years of declining production and stagnant growth. Milk production in the country has been growing at 2% to 3% for the past couple of years, however, with recently forged free trade agreements giving the industry greater access to growing markets in Asia, Fonterra hopes to use its funding to raise growth to between 5% and 6%.
The structure of the trust mandate would also allow for investment in dairy farms where the operator plans to leave a competitor and transfer its supply to Fonterra, giving Fonterra the financial leverage to lure producers away from rivals such as Murray Goulburn and Bega Cheese.
Farmers will retain a majority ownership in their dairy operation to keep motivation high to realize growth and generate healthy returns for investors. For farmers, the trust will provide access to long-term pension fund capital with a 30 year horizon – something that has generally been missing in the ag finance space.
Fonterra executives are reluctant to comment on the eventual size of the corpus of the trust, however have commented that it will be allowed to reach its ‘natural scale’, adding that there is an expectation that the funding model will be imitated by competitors, as is seen, in part, by Murray Goulburns’s $500 million listing on the ASX planned for June of this year.
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