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FONTERRA UPDATE

FONTERRA UPDATE. New Zealand Cold Storage Association. Confidential to Fonterra Co-operative Group. August 2014. Background – Industry Growth.

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FONTERRA UPDATE

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  1. FONTERRA UPDATE New Zealand Cold Storage Association Confidential to Fonterra Co-operative Group August 2014

  2. Background – Industry Growth NZ’s pastoral based dairy sector has grown strongly as a result of increasing hectares under dairy, average cows per hectare, and average production per cow. Source: NZ Dairy Statistics Production has more than doubled

  3. Background - Global supply and demand overview • China imports 1.5 MT of dairy products, or 13.4% of global imports • Russia imports 1.4 MT of dairy products, or 12.5% of global imports • Global dairy importers • Chinese dairy consumption – by product origin Source: Fonterra; China Dairy Association, China Customs, Rabobank estimates and forecasts 2014.

  4. Background - Fonterra overview • World’s largest processor of dairy products • Consumer and Foodservice operations in China, Asia, Middle East, Latin America, Oceania • International Farming Ventures – China • Access to global milk pools • Collects ~88% of New Zealand’s milk • Processes approximately 22 billion litres of milk per year

  5. Background - Fonterra global ingredients The world’s largest milk processor Fonterra’s share of global dairy exports² Note: These figures are sourced from the TAF prospectus, issued in October 2012 • Milk intake figures above are measured in millions of tons (not billions of litres) and represent milk volume collected and commodity purchases for the company and its subsidiaries. 50% of Dairy Partners America milk intake has been allocated to each of Fonterra and Nestle. Source: IFCN Dairy Network. Analysis is based on the IFCN Dairy Report 2012. Data represents in most cases the year 2011 (Nestlé data represents the year 2010). • Figures are for the 2011 / 2012 Season. Global Dairy Exports means the market for the cross-border trade of dairy products but excludes trade among countries within the European Union. Source: Fonterra, Global Trade Information Services.

  6. Background – The year that was …Our strategic response A challenging year… Margin squeeze in consumer STAY ON STRATEGYTurning the Wheel • STRATEGIC REVIEW • Optionality • Portfolio optimisation • Multi hubs Negative stream returns Precautionary recall RENEWED FOCUS ON FOOD SAFETY AND QUALITY

  7. Strategic overview

  8. Consistent consumer trends influencing our business Rise of emerging markets Nutrition for the old Nutrition for the young Food safety and quality Commodity price volatility Route to Market

  9. The outlook for global trade in dairy products: a view to 2020 Outlook to 2020¹ 7% 1% <1% 10% 4% 7% Europe China 1% <1% 4% Nth America 2-3% India² 4% 2% ASEAN 2% 2% MENA 2% 1% LATAM ANZ Demand volume Demand growth Supply volume Supply growth Source: Fonterra estimate • Current volumes are represented by the area of the circles displayed. Growth rates represent forecast compound annual growth rates. • Although strong growth in demand is expected in India, the ability to supply is likely to remain limited. In the 12 months to May 2012, Fonterra exported 22,300 MT of product to India and total imports represented approximately 0.2% of consumption.

  10. Our journeyto becoming a globally relevant Co-op

  11. Value creation by ‘Turning the Wheel’ Growth in Consumer and Foodservice volumes Drive price achievement in Ingredients Return on Capital (ROC) > WACC

  12. Investing in optionality to achieve less volatile returns ASSET OPTIONALITY F15 F16 F17 F18 F19+ A Plant productivity Expand capacity Advance investment Maintain flexibility MIX OPTIMISATION B Review constraints Centralised management Physical trading DEEPER FINANCIAL (FUTURES) MARKETS C Develop WMP futures market GrowWMP futures volumes Asset-backed trading

  13. What does this mean for Cold Storage?

  14. V3 & Strategic Priorities 1 Optimise NZ milk Redefine milk supply model Invest in optionality to achieve higher less volatile returns 2 Buildandgrow beyond our current consumer positions 3 Deliver onFoodservice potential Focus on strategic and leadership markets Focus on 5 global brands 4 Grow our Anlene business 5 Develop leading positions in paed & maternal nutrition Investment in global multi-hubs 6 Selectively invest in milk pools Organisational changes to support strategy Food safety and quality 7 Align our business and organisation

  15. Logistics Network Fonterra’s logistics network is responsible for storing, moving and shipping: . • Packaging and Ingredients from suppliers through to our NZ-based manufacturing plants • Finished goods from NZ-based manufacturing plants through to end customers Value Chain Fonterra Logistics Network 4

  16. Guiding principles of our future logistics network The pathway to our future logistics network, is guided by the following key principles: Consolidating flows into major ports, to attract bigger ships 1 Enhancing our logistics network’s storage infrastructure 4 3 Optimising our domestic freight network 2 Establishing global connectivity, through international hubs Leveraging our strategic vendors capabilities Ensuring sustainable network infrastructure & flows 7 6 Developing our future operating capabilities 5

  17. Optimising our asset footprint to support premium growth platforms High NeutralInvest if returns significantly exceed cost of capital over time Accelerate Investment UHT Mozzarella Nutritionals Cream Cheese Supports V3 Strategy Reduce Grow with Market Natural Cheese Butter / AMF WMP / SMP Casein Low Supports Earnings Stability / Growth Low High

  18. Foodservice and consumer roll-out • Launched Anchor™ UHT • Launched Anmum™ infant formula • Expansion of Anlene™ in mainland China • Continued success in Foodservices expansion

  19. In summary

  20. Thank you.

  21. Supplementary Slides

  22. China China is a key driver of global dairy markets, and will be a key influencer of long term supply / demand balance and commodity prices Source: United States Department of Agriculture – Economics, Statistics, and Market Information System Recent Rabobank analysis estimates supply gap at 10bn litres and growing • Demand • China is a key driver of global dairy markets • Growing “westernisation” of diet - were China’s dairy consumption per capita to equal that prescribed by FAO, consumption would need to grow an additional 230m tonnes (from ~35m tonnes currently) • Domestic production growth unable to meet demand. Strong focus on quality and brand following Melamine scandal in 2008 • Imports up 39% for year to February 2014. Mostly WMP (China now accounts for 32% of global WMP imports) • Supply • NZ largest exporter by some margin • China nearly 40% of NZ’s total dairy exports (mostly WMP) • Fonterra establishing “milk hubs” in China. China’s large dairy companies also developing large scale dairy farms in China • Other large milk producers largely for domestic consumption, with marginal production flowing to export markets (where possible) • Generally more intensive, grain fed, dairy markets dependent on grain prices to be competitive internationally • Given size of in-market production in these countries, small shifts can have magnified effect on export market • EU coming off quotas in 2015 – ramp up in production in Germany, Netherlands, and Ireland expected to hit export markets

  23. Investing in China milk pool • Investing in farms that will integrate with downstream positions • Strong platform to launch from – pipeline of livestock, sites, capability • Adopting a hub approach, starting with Yutian, supplying Beijing • Hub: 4-5 farms in one region • Allows flexibility in developing downstream partnerships • Further expansion, pursued through partnership Growing to one billion litres by 2020 Our focus is to roll out a new farming hub every 12-18 months

  24. Supply Chain Collaboration 4 July 2014

  25. NEW ZEALAND MARKET • “Big Ship” benefits are dependant on: • Full ships • Commercialised benefit sharing models • Port Infrastructure capability • Consolidated Demand • Deployment of assets and feasible modes available for consolidation purposes • Rail versus Road • Coastal Shipping OCEAN COSTS LANDSIDE COSTS without collaboration Without freight owner/ stakeholder collaboration, there is a risk of an increase in waste and costs across the entire supply chain. Tipping Zone • Big Ship Benefits • Securing long term direct vessel calls for NZ • 31% Lower carbon emissions per TEU • 25% reduction in operating cost per TEU • Sustainable returns for carriers • Sustainable services for freight owners • Reduced ocean freight pricing over time Costs per TEU LANDSIDE COSTS with collaboration Ship Size

  26. Alliances Summary – 3 Co-Dependent Engagements to drive Big ship efficienciesDelivering Value, Control, Traceability and Simplicity to the Finished Goods Supply Chain Big Ship Benefits Commercial model to share Big Ship Value Maersk Line Ocean Alliance Import/Export Vessel Calls Direct Volume Commitment Commitment to Port Investment Vessel Calls Direct Volume Timaru Port Port of Tauranga Enables Hinterland Expansion Facilitates Kotahi Commitment

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