Contract Supply Changes To Protect Shareholders

Media Release

4 November 2008

Contract Supply Changes To Protect Co-Op's Shareholders

Fonterra today announced that it will be making changes to contract (non share-backed) milk supply for the coming 2009/10 season to ensure the Co-operative's balance sheet remains strong during the current period of instability in financial markets.

Fonterra Chairman Henry van der Heyden said the changes to the terms of contract milk supply for next season were "necessary and recognise the absolute priority the Fonterra Board places on protecting the interests of our farmer-shareholders, who make up 96% of our supply base".

As announced to farmers last week, contract milk will be available only to 'growth milk' from existing farmers or new milk from conversions. Shareholders will not be able to surrender, or cash-up, shares to supply on contract. To reflect the increased cost of capital and the value of share capital to the Co-operative, he said the price for contract milk would be set at 10 cents below the Milk Price for 2009/10 and Fonterra would require all milk to be fully share-backed within three seasons (hold shares equivalent to their milk supply and for any increases in their production over time). The contract price for the current season is 2 cents below the Milk Price.

"In a tightening credit market, this is about protecting our shareholders from the risk of a significant expansion of contract supply and the resulting surrender of shares. While we need to encourage new milk into the Co-operative and growth from our existing farmers, in the current environment too much milk not backed by share capital will, over time, weaken our balance sheet and place an unnecessary financial burden on Fonterra's capital structure."

"Our farmers need to know that we're doing all we can to make sure their Co-op, the source of their livelihoods, is strong and not overly exposed to the global forces that are buffeting companies here in New Zealand and around the world."

Mr van der Heyden said that along with the changes to contract milk and the decision to retain from last season's payout, the company had been refinancing portions of its debt, and was looking at other prudent avenues to make sure Fonterra's balance sheet is suitably protected.

Mr van der Heyden said all current contracts, including tactical pricing contracts with Fonterra, would be honoured for their full term. Current contract suppliers have been offered the chance to enter into the new contracts that will allow them a three-year step up period to buy the required shares.

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