A catalyst for Dairy Farmers?

First action to close the discount on DFoB loan stocks

A boring note on one of my own investments today. I’ve just noticed that Dairy Farmers of Britain slipped out an important announcement on December 24th:

“A number of important Board-proposed changes to our capital structure to better reward and support committed members has been passed from this month’s Regional Chairmen’s Committee to full Council for consideration next month and implementation – subject to approval – early in the New Year. Foremost amongst these are:”

“To give all members the opportunity to reach the 4ppl investment level at which capital retentions cease as rapidly and economically as possible by buying loanstock at market value and transferring it into their MIAs at face value;”

“To encourage expansion by setting a fixed level of production rather than rolling annual average as the base for calculating the 4ppl MIA minimum funding requirement; and,”

“To provide retiring members with the flexibility to leave their capital in their interest-earning MIAs, access it over three years from the third anniversary of their notice, and earn substantially better returns than those resigning to sell their milk elsewhere.”

For outside investors in the loan stocks (see here, here and here) the relevant point is the first one. In essence DFoB plans to let its members buy loan stock at the market price (currently around 60p) and return it to the company at face value (which is £1). I assume they mean the loan stocks that trade on Sharemark.

MIA stands for Member’s Investment Account. As I understand it, the co-operative funds itself by keeping back a small amount of what it pays a farmer for milk until that farmer has a set amount of capital in the business (4 pence per litre of milk sold in a year). The MIAs turn into loan stock when a farmer leaves the co-operative. Under the DFoB plan, new farmers would be able to turn loan stock back into MIAs, thus buying out the retiring members.

It makes a lot of sense and may mean that DFoB is waking up to how low its loan stocks are trading on the secondary market. Its plan should be tempting to farmers - why pay £1 in deductions when you can buy at 60p in the market? If this does happen, it should produce an increase in demand for DFoB loan stock on Sharemark.

There are three caveats. First, DFoB members may not have the spare cash to invest in their co-operative up front. Second, they may not understand or be interested in the arbitrage that is on offer to them. And third, this is an outline plan that may not happen, or may not be open to external holders of loan stock.

As I have written before, I think that these bonds offer compelling value, often yielding 15 per cent or more to maturity. To realise that value quickly, however, DFoB would have to do the sensible thing and buy back loan stock itself.

Disclosure: I own Dairy Farmers of Britain Loan Stock 2012, 2015 and 2016. As ever, please note the disclaimer above and remember that I am not advising you to buy or sell anything.

January 4, 2008 | Filed Under Companies

 

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4 Responses to “A catalyst for Dairy Farmers?”

  1. Stock Market » A catalyst for Dairy Farmers? on January 4th, 2008 4:05 pm

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  3. Sharemark Auctions Jan 25th : The Rogue Analyst on January 25th, 2008 2:29 pm

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