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Fonterra Retains Forecast Payout

Media Release
14 December 2005

Fonterra Retains Forecast Payout And Announces 42 Cent Increase in Estimated Fair Value Share Price

Fonterra Co-operative Group has affirmed its forecast payout of $4 per kilogram of milksolids for 2005/06 and announced an increase of 42 cents in its estimated Fair Value Share price for 2006/07.

Forecast Payout

In May Fonterra announced a forecast payout for 2005/06 of $3.85 per kilogram of milksolids. This forecast was raised to $4 per kilogram of milksolids in September, and re-affirmed today.

“As we anticipated in September, nothing has changed in the past few months to cause us to alter forecast payout,” said Fonterra Chairman Henry van der Heyden.

“Underlying market conditions remain stable with commodity prices generally holding at the upper end of their range. Supply and demand remain balanced on world markets. Mixed weather since August has meant we're on track for an average production year in New Zealand. Meanwhile, the US dollar continues to be weak, lowering our returns in NZ dollar terms.

“The stable forecast should come as no surprise. When we raised the payout forecast in September from $3.85 to $4, we said then that we did not expect any significant upside in returns and that a considerable part of the 15 cent improvement would in fact be coming from cost reductions and efficiency gains in the business. That’s proved to be the case.

“Management is working hard to reduce costs and improve productivity throughout the business. We’re realising some of the benefits of the business reorganisation that’s been taking place over the past year, as well as bringing forward as many programmes as we can to capture their gains in the current year.”

Fair Value Share

The estimate of the Fair Value Share price for the 2006/07 season is $5.86 – an increase of 42 cents over the Fair Value Share price for the current season. This estimate relates to the share price that will apply to most transactions in the 2006/07 season.

This estimate was set by the Board after consideration of a range estimated by the independent valuer, Duff & Phelps, appointed by the Shareholders’ Council*.

Mr van der Heyden welcomed the increase, saying it represented further independent confirmation of Fonterra’s healthy long-term prospects.

“The Fair Value Share price represents the value that Fonterra is going to return to shareholders on a sustained basis over and above the value of their milk at the farm gate. While payout is a snapshot of performance for one season, the Fair Value Share price takes into account Fonterra’s long-term prospects.

“It is very pleasing that the independent valuer has continued to note progress in the business, reflected in the higher valuation range from which the Board has set the estimated Fair Value Share price.”

Changes to Capital Structure

As a result of the changes to Fonterra’s capital structure that were approved by shareholders in May 2005, amounts invested by shareholders in the form of Peak Notes will be converted into ordinary share capital. To achieve this, Fonterra’s share standard will change at the beginning of the 2006/07 season, requiring shareholders to hold more than one share for every kilogram of milksolids supplied. When all the changes to the new capital structure have been made, shares will then be consolidated back to the more traditional one share per kilogram of milksolids.

While there will be fewer shares following consolidation than there will be at the beginning of the 2006/07 season, the total value of a shareholder’s investment will remain the same as the value of each Fair Value Share will correspondingly increase after consolidation. The final consolidation calculation will depend on a number of variables, such as Fonterra’s peak supply factor, which won’t be known until later in the season. However, in accordance with the constitution and as a guide, the Board has estimated that the final Fair Value Share price following consolidation will be around $6.65 per share.

Based on this estimate of the Fair Value Share price the value of the average shareholder’s total investment in Fonterra following consolidation will have increased by about six percent on a like for like basis over the previous year.

*Change in Independent Valuer for the FVS

In September it was announced that Standard & Poor’s, which since Fonterra’s inception had provided independent valuations of the FVS through its valuation practice Corporate Value Consulting (CVC), had sold CVC to financial advisory firm Duff & Phelps.

All 58 partners of CVC have moved to the new firm and now operate under the Duff & Phelps name. The team from CVC which values the FVS range has developed a comprehensive knowledge of Fonterra over the past four seasons. The Shareholders’ Council, which is responsible for appointing the independent valuer for the FVS, considered it important that the stability and continuity of the valuation process be maintained and for that reason assigned the valuation contract for 2006/07 to Duff & Phelps. The analysis to derive the FVS range remains the same.

Information on Duff & Phelps can be found at

Background to the Fair Value Share Process

Before the creation of Fonterra, shares in dairy companies had fixed nominal values, which often had little relationship to the underlying value of the company. Fair Value Shares were introduced under Fonterra’s Constitution on its formation in 2001 to reflect more accurately the investment of farmers in their company. Farmers are required to hold one Fair Value Share for each kilogram of milksolids they supply to Fonterra, although this will change at the beginning of the 2006/07 season to allow for the transition to the new capital structure approved by Fonterra shareholders in May 2005.

Fonterra’s Board of Directors sets the price from within a valuation range provided by the independent valuer appointed by Fonterra’s Shareholders’ Council. The final share price must be set before June 1, the start of the dairy season when most dairy farm and herd transactions occur. For the 2006/07 season, two share prices will be set – one to apply prior to consolidation of shares and Peak Notes and the other to apply following consolidation.

To assist farmers in planning production levels and budgets for the season ahead, Fonterra is required to provide shareholders with an estimate of the share price by December 15 each year.


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