Wellington, June 30 NZPA - Fonterra directors today won over sufficient farmer shareholders to endorse changes to the cooperative's constitution that will allow share trading among farmers.

Farmers voted 89.85 percent in support -- with a strong turnout by smaller farmers -- at Fonterra's special meeting at Palmerston North, to enable the crucial third stage of the cooperative's latest attempt to re-jig its capital structure.

"Our farmers have voted in record numbers and those who voted represented 77.77 percent of the cooperative's milksolids," said Sir Henry van der Heyden, the "delighted" chairman of directors representing 10,500 farmers.

"It signals a clear mandate".

In earlier ballots, shareholders voted 89 percent in favour of strengthening the share structure, and reducing the share price, and 91.2 percent in favour of constitutional change to allow those changes.

Voting in Fonterra is weighted according to a farmer's milkflows, with larger suppliers having a bigger share of the voting power, and a 75 percent majority is needed to approve constitutional change.

A previous effort by directors to re-structure capital through a partial share float on the stock exchange was howled down by farmers in 2007. Before today's vote, Federated Farmers dairy chairman Lachlan McKenzie said farmers had long memories, and that some farmers would still like to see someone at Fonterra fall on their sword for the original proposal three years ago.

Sir Henry said today's vote, together with his board's new policy of retaining 25 percent to 35 percent of distributable profit, would take the long-running debate over capital structure off the table.

Over a total of about $40b in milk payouts since it was created in 2001, the cooperative retained an average of less than 1c/kg of milksolids, but farmers have said the new retentions policy has the potential to raise $1.3 billion in new capital.

Fonterra directors will now spend next 15 months setting up a mechanism so that farmers cutting milkflows or quitting the cooperative can redeem their shares by selling them to other farmers at a market value, rather than calling on the cooperative to redeem them at face value.

Sir Henry has described the changes as stopping money "washing in and out of Fonterra's balance sheet from season to season" and providing permanent capital to grow returns.

The "redemption risk" to Fonterra's balance sheet has until now meant that regular retentions would have lifted the value of the cooperative's shares, providing farmers with more motive to cash up their stakes.

The company was also faced with sudden demands on its cash by redemptions during droughts, when milkflows dropped. It was looking ahead to the likelihood of similar pressures when future rivals woo farmers away from the cooperative.

Work will now begin on the detail of the share trading, alongside a shareholders fund, through which farmers needing cash can free up some of their share capital by selling rights to dividend flows without losing ownership of the shares.

The fund will kill two birds with one stone -- allowing farmers to control voting rights and ownership of the shares, but also giving the public access to dairy dividends without having to own a farm.