Fitch Assigns Ratings Fonterra At ¡¥AA-/F1+¡¦

Fitch Assigns Ratings To New Zealand¡¦s Fonterra Co-Operative Group Limited At ¡¥AA-/F1+¡¦

Fitch¡VBrisbane/Hong Kong/London¡V16 April 2002: Fitch Ratings, the international ratings agency, has assigned a foreign currency Long-term rating of ¡¥AA-¡¦ (AA minus) and a Short-term of ¡¥F1+¡¦ to Fonterra Co-operative Group Limited (¡§Fonterra¡¨).

Also assigned are ratings of ¡¥AA-¡¦ to unsubordinated notes issued under Fonterra¡¦s USD2.0 billion Euro Medium Term Note programme (EMTN) and of ¡¥A+¡¦ to any subordinated notes issued under that programme. Finally, an ¡¥F1+¡¦ rating is assigned to Fonterra¡¦s USD1.5bn Euro Commercial Paper (ECP) programme and USD1.5bn USCP programme. The Long-term rating Outlook is Stable.

Fonterra¡¦s ratings reflect its position as a near-monopsony for New Zealand¡¦s milk production (about 98% of the country¡¦s dairy farmers are Fonterra co-operative members) and as a near-monopoly for the country¡¦s dairy exports. The ratings also acknowledge Fonterra¡¦s diverse range of dairy products; its geographically diverse export markets; and the New Zealand dairy industry¡¦s position as the least-cost producer in the world. High barriers to entry in the industry exist within New Zealand and Fonterra is of prime importance to the country¡¦s economy, representing 7% of GDP and 20% of foreign currency earnings.

Fonterra¡¦s ratings also reflect a solid financial profile, underpinned by the contractual subordination of up to one-third of milk supply payments to its shareholder farmers. Representing around 53% of Fonterra¡¦s cost base, milk supply costs are paid by instalment, with Fonterra retaining the contractual right to withhold up to one third of the amount due in order to ensure it has the capacity to meet debt service commitments and obligations to other creditors.

Risks to Fonterra¡¦s rating include:
„h any loss of milk supply arising from weather or disease or natural catastrophe;
„h any competitor establishing significant processing capacity;
„h any widespread shift from dairy farming to next-best land use;
„h any integration problems that may result from the recent merger (see below);
„h and the limitation on access to equity capital markets imposed by the co-operative structure.

However, the rating Outlook is Stable as Fitch does not envisage these risks crystallising in the medium term.

Fitch will monitor closely the extent of Fonterra¡¦s future investment in unconsolidated entities; the future balance between those operations that benefit from the cost pass-through mechanism and those that do not; and any signs that competitors might set up substantial milk processing capacity to threaten Fonterra¡¦s near-monopsony for New Zealand¡¦s raw milk.

Fonterra is New Zealand¡¦s largest company and one of the world¡¦s leading producers and exporters of dairy products. It was formed through the merger of three domestic entities in October 2001. Fonterra¡¦s 14,000 members (dairy farmers who are shareholders in the co-operative) supply around 12 billion litres of milk per annum for processing. Fonterra has a unified and vertically integrated production and export marketing structure that spans 140 countries. It is the largest individual player on the international dairy market, accounting for about 30% of all products traded there. The Cooperative¡¦s assets exceed NZD12bn and revenues are more than NZD14bn per annum.

A full research report will be available on the agency¡¦s web site, www.fitchratings.com.

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