Fonterra Shareholders' Fund (NS) — Management Reports 2017

Aug 28, 2017

AUGUST 2017

GLOBAL DAIRY UPDATE

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OUR MARKETS

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OUR PERFORMANCE

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• Further decline in Australian production, EU production flat.

• New Zealand and EU exports up for the year, increase in US exports.

• Strong import growth in China, Latin America and Asia imports grew over the year.

• Cream cheese innovation at the heart of significant new build.

• Australian mozzarella to take a bigger slice of China’s pizza boom.

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• In July, Fonterra New Zealand milk collection reached 17 million kgMS and Fonterra Australia collection reached 8 million kgMS, up 5% and 28% respectively on last season.

KEY DATES

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Late September 2017 Early November 2017 Early November 2017 1 December 2017 Annual Results Announced Fonterra Co‑operative Group Fonterra Shareholders’ Fund Compliance Date for Share Annual Meeting Annual Meeting Standard 2017/18 Season

1

OUR MARKETS GLOBAL PRODUCTION

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FURTHER DECLINE IN AUSTRALIAN PRODUCTION, EU PRODUCTION FLAT

To view a chart that illustrates year‑on‑year changes in production –

CLICK HERE

NEW ZEALAND

AUSTRALIA

EUROPEAN UNION

USA

% 1 Production change for the 12 months to June 2017

% 8

Production change for the 12 months to May 2017

% 2

Production change for the 12 months to May 2017

% 2

Production change for the 12 months to June 2017

Total New Zealand milk

production in June was up 21% compared to the same month last year.

In New Zealand, volumes are typically low at this time of year due to seasonality of supply. Volumes will start to build over the coming months.

For the 12 months to June, milk production was down 1% compared to the same period the previous year.

Fonterra collections have been reported for July, see page 5 for details.

Australia production

in May decreased 3% compared to the same month last year.

Production for the 12 months to May was down 8% compared to the same period last year. Wet conditions in winter and spring heavily impacted volumes ,though late seasonal recovery was seen in some regions.

Fonterra collections in Australia have been reported for July, see page 5 for details.

EU production in May was flat compared to the same month last year.

Ireland, Spain and Poland were up 7%, 4% and 3% respectively, while the two biggest producers in Europe, Germany and France, were down 2% and 3% respectively. This is largely due to continued adverse weather conditions in Europe.

Production for the 12 months to May was down 2% compared to the same period last year.

US production in June increased 2% compared to the same month last year. Monthly volumes have been increasing at a rate of around 2% for each of the past 12 months.

Milk production for the 12 months to June increased by almost 2% compared to the same period the previous year.

2

OUR MARKETS GLOBAL EXPORTS

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NEW ZEALAND AND EU EXPORTS UP FOR THE YEAR, INCREASE IN US EXPORTS

To view a chart that illustrates year‑on‑year changes in exports –

CLICK HERE

NEW ZEALAND

AUSTRALIA

EUROPEAN UNION

USA

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%
2
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Export change for the 12 months to May 2017

% 4

Export change for the 12 months to May 2017

% 2 Export change for the 12 months to April 2017

% 14

Export change for the 12 months to May 2017

Total New Zealand dairy

exports in May increased 1% compared to the same month last year. Combined growth of 14% in WMP and cheese was offset by declines in AMF and SMP, down 40% and 14% respectively.

For the 12 months to May, exports were up 2%, or 64,000 MT compared to the same period the previous year.

WMP and SMP, which make up 54% of New Zealand exports, were both flat. Fluid and fresh dairy and cheese were up 67,000 MT and 16,000 MT respectively, a combined increase of 16%. This was partially offset by declines in AMF and casein, down a combined 11%.

Australia dairy exports

in May decreased 6% or 4,000 MT compared to the same month the previous year. Increases were seen across the two largest export categories, fluid and fresh dairy and cheese, up a combined 7,300 MT. This was offset by declines in most other categories, particularly whey powder, WMP and SMP, down a combined 8,000 MT compared to the same month last year.

Exports for the 12 months to May were down 4%, or 31,000 MT, on the previous comparable period.

SMP exports continued to decline, down 25%. This was partially offset by increases in fluid and fresh dairy, up 8%.

EU dairy exports in April decreased 3% or 14,000 MT compared to the same month last year.

Fluid and fresh dairy, the largest export category, was down 19% or 26,000 MT. Growth in other key categories such as SMP and cheese reduced the overall impact of this decline.

Exports increased 2% or 104,000 MT for the 12 months to April compared to the same period the previous year. Growth continues to be driven by cheese and infant formula, up a combined 10% or 122,000 MT.

US dairy exports increased 15% or 26,000 MT in May, compared to the same month last year. Production volumes continue to increase at a rate of around 2% month‑on‑month. Growth was driven by SMP, cheese and whey powder, three of the largest US export categories, up 32%, 47% and 17% respectively.

For the 12 months to May, exports increased across all of the major exporting products except lactose which was flat.

3

OUR MARKETS GLOBAL IMPORTS

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STRONG IMPORT GROWTH IN CHINA, LATIN AMERICA AND ASIA IMPORTS GREW OVER THE YEAR

To view a chart that illustrates year‑on‑year changes in imports –

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CLICK HERE
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LATIN AMERICA

ASIA

MIDDLE EAST & AFRICA

CHINA

% 10

Import change for 12 months to April 2017

% 12 Import change for 12 months to April 2017

% 4

Import change for 12 months to April 2017

% 8

Import change for 12 months to June 2017

Latin America ¹ dairy import volumes decreased 10%, or 17,000 MT, in April compared to the same month last year. WMP and fluid and fresh dairy, which were down a combined 29% or 17,000 MT, led this decline.

Imports for the 12 months to April were up 10% or 179,000 MT, compared to the same period the previous year. Growth was driven by increased imports of cheese and WMP, up a combined 21% or 116,000 MT.

Asia (excluding China) ² dairy imports increased 5%, or 17,000 MT, in April compared to the same month last year.

WMP, cheese and lactose were up 18%, 14% and 19% respectively, while SMP and infant formula were down a combined 10%.

For the 12 months to April, imports were up 12%, or 468,000 MT, compared to the same period last year. Increases were seen across all major import categories.

Middle East and Africa dairy imports decreased

11%, or 37,000 MT, in April compared to the same month the previous year. This is largely due to fluid and fresh dairy, butter and infant formula, down a combined 27,000 MT.

Imports for the 12 months to April were down 4%, or 145,000 MT, compared to the same period the previous year. Declines were seen across all major categories except SMP, which was up 4%.

China dairy imports were

up 27% or 52,000 MT in June compared to the same month last year. Growth was seen across all categories except for lactose.

Imports for the 12 months to June were up 8%, or 170,000 MT, compared to the same period last year. Whey powder, infant formula and cheese, three of the larger import categories were up a combined 19% or 140,000 MT.

2 Includes estimate for Indonesia (April) and Macao (October‑April).

1 Excludes Nicaragua.

4

OUR MARKETS

FONTERRA MILK COLLECTION 2016/17 SEASON

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To view a table that shows our detailed milk collection in New Zealand and Australia compared to the previous season –

NEW ZEALAND MILK COLLECTION

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100
80
60
40
20
0
JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY
2017/18 2016/17 2015/16
VOLUME (M LITRES/DAY)
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CLICK HERE

NEW ZEALAND

NORTH ISLAND

SOUTH ISLAND

AUSTRALIA

10%

Increase for the season from 1 June to 31 July

10%

Increase for the season from 1 June to 31 July

16%

Increase for the season from 1 June to 31 July

28%

Increase for the season from 1 July to 31 July

Fonterra’s milk collection across New Zealand for the two months to 31 July reached 29 million kgMS, 10% ahead of the same period last season but generally in line with more normal production levels.

New Zealand collections in July reached 17 million kgMS, 5% up on the same month last season. Although collections through early July were higher, they have now eased as incentives to boost winter production finish. Conditions are currently challenging on‑farm after continued wet weather through July. Spring calving is now underway and farmers will be hoping for drier weather as the season progresses.

North Island milk collection in July reached 16 million kgMS, 5% higher than July last season. Winter milk incentives finished in the North Island mid‑month and daily collections are now in line with last season.

South Island milk collection in July reached 2 million kgMS, 16% higher than July last season.

There has been a small number of farms flooded in the central and lower South Island after heavy rain hit in late July. Challenging conditions for farmers now beginning calving with significantly more rain than normal for this time of year.

Fonterra’s milk collection across Australia in July, the first month of the 2017/18 season, reached 8 million kgMS, 2 million kgMS higher than July last season.

In July, more than 50 farmers moved supply to Fonterra from other milk processors. This combined with a milder winter than last year has resulted in a significant lift in milk volumes, although it is still early in the season.

5

OUR MARKETS

FONTERRA GLOBALDAIRYTRADE RESULTS

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Fonterra GDT results at last trading event 15 August 2017:

0.2%

Change in Fonterra’s weighted average product price from previous event

USD3,387 Fonterra’s weighted average product price (USD/MT)

31.4000’ MT Fonterra product quantity sold on GDT

RENNET CASEIN

CHEDDAR

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SMP
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2.2% 1.9% 0.2%
USD 6,255/MT USD 4,005/MT USD 1,967/MT
BUTTER WMP AMF
% % %
0.2 0.4 1.4
USD 5,735/MT USD 3,143/MT USD 6,199/MT
Fonterra GDT sales LATEST AUCTION FINANCIAL
YEAR‑TO‑DATE
by destination :
NORTH ASIA (INCLUDING CHINA)
SOUTH EAST ASIA
To view more information, MIDDLE EAST AND AFRICA 31,365 63,079
including a snapshot of the MT MT
rolling year‑to‑date results – LATIN AMERICA
OTHER
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CLICK HERE

The next trading event will be held on 5 September 2017. Visit www.globaldairytrade.info for more information.

Dairy commodity prices and New Zealand dollar trend

In July the New Zealand dollar continued to strengthen against the United States dollar and reached the highest level since late 2015. In August the New Zealand dollar has come back down against most major currencies including the United States dollar.

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1,200 0.80
1,000 0.75
800 0.70
600 0.65
400 0.60
AUG 15 OCT 15 JAN 16 MAR 16 JUN 16 AUG 16 OCT 16 JAN 17 MAR 17 JUN 17 AUG 17
G DT PRICE INDEX NZD/USD SPOT RATE
PRICE INDEX NZD / USD
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6

OUR PERFORMANCE

Dairy lovers across Asia will soon get their first taste of an innovative new cream cheese, as Fonterra announces plans for two new cream cheese plants at its Darfield site in Canterbury. With cream cheese undergoing a steady surge in popularity in Asia, the $150 million two‑stage project will see the first plant completed in 2018 and the second will follow in 2019 or 2020.

Cream cheese innovation at the heart of significant new build

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The new plants will incorporate technology that allows the firmness and consistency of the cream cheese to be dialled up or down to meet customer preference.

Fonterra’s Director of Global Foodservice, Grant Watson, says the investment is a timely one as more and

Mozzarella made at Fonterra’s new cheese plant in Stanhope, northern Victoria, will soon be topping pizzas at restaurants in China.

Australian mozzarella to take a bigger slice of China’s pizza boom

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The first mozzarella is rolling off the line as the plant prepares to start global production in the coming months, bringing Fonterra’s mozzarella production back to Australia for the first time since 2013.

Fonterra Australia’s Managing Director, René Dedoncker, says it’s a significant step for our

more consumers across Asia develop a preference for milk‑based products.

“What’s really promising are the trends we’re seeing in cheese, butter and UHT over the years – not just in the sale of dairy products, but how they are being consumed. Particularly as the major urban centres in China shift away from oils, people are actively seeking more dairy in their diet whether in their cooking, as a table spread or in a glass,” says Mr Watson.

“In markets like China – where dairy hasn’t traditionally been a staple – there are fewer pre‑conceived notions around how it should be eaten, and with that we’re seeing remarkable versatility in their dairy applications.”

Australian business to resume making mozzarella for the domestic and export market, particularly China where there is strong demand for our cheese.

“New Zealand‑made

Fonterra cheese is already topping more than half the pizzas made in China, and now we will be sending our Australian‑made mozzarella,” says René.

40% of people in urban China now eat at Western‑style fast food outlets once a week, and the use of dairy in foodservice

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“Arguably some of the most innovative dairy product development anywhere in the world is happening right now in China and, through our Anchor™ Food Professionals team and their engagement with our customers, we’re playing an integral role,” he says.

Dairy beverages such as tea macchiato – which mixes tea with cream and cream cheese – are evidence of a willingness to be bolder with dairy applications, says Mr Watson.

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has grown by over 30% in just five years according to a Nielson survey.

“As disposable incomes rise in China, spending on dining‑out is growing, and pizza is a very popular menu choice. They want the extra stretch, softness and flavour of our mozzarella made with high‑quality Australian milk.

“This supports our strategy to be Fonterra’s global hub for cheese, whey and nutritionals” says René.

7

SUPPLEMENTARY INFORMATION

Global Dairy Market

The charts on the right illustrate the year‑on‑year changes in production, exports and imports for a range of countries that are important players in global dairy trade.

The absolute size of the bars represents the change in production, exports or imports, relative to the same period the previous year.

Averages are shown where data is complete for the regions presented.

PRODUCTION

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400
200
0
-200
-400
-600
-800
JUL 16 AUG 16 SEP 16 OCT 16 NOV 16 DEC 16 JAN 17 FEB 17 MAR 17 APR 17 MAY 17 JUN 17
NEW ZEALAND EU27 UNITED STATES AUSTRALIA AVERAGE
NOTE: Data for EU and Australia to May and New Zealand and US to June.
LIQUID MILK (M LITRES)
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BACK TO SUMMARY

BACK TO SUMMARY

EXPORTS

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120
80
40
0
-40
-80
JUN 16 JUL 16 AUG 16 SEP 16 OCT 16 NOV 16 DEC 16 JAN 16 FEB 17 MAR 17 APR 17 MAY 17
NEW ZEALAND EU27 UNITED STATES AUSTRALIA AVERAGE
NOTE: Data for EU to April; New Zealand, US and Australia to May.
MT (000s)
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IMPORTS

BACK TO SUMMARY

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200
150
100
50
0
-50
-100
JUL 16 AUG 16 SEP 16 OCT 16 NOV 16 DEC 16 JAN 16 FEB 17 MAR 17 APR 17 MAY 17 JUN 17
ASIA CHINA MIDDLE EAST & AFRICA LATIN AMERICA AVERAGE
MT (000s)
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NOTE: Data for Asia, Middle East and Africa and Latin America to April, China to June. SOURCE: Government milk production statistics/GTIS trade data/Fonterra analysis.

8

SUPPLEMENTARY INFORMATION

Fonterra milk production

The table on the right shows Fonterra milk solids collected in New Zealand and Australia compared to the previous season.

BACK TO SUMMARY

MILK COLLECTION	JULY	JULY	MONTHLY	SEASON-	SEASON-	SEASON-
(MILLION KGMS)	2017	2016	CHANGE	TO-DATE	TO-DATE	TO-DATE
				2017/18	2016/17	CHANGE
Total Fonterra	17.2	16.3	5.4%	29.0	26.2	10.4%
New Zealand
North Island	15.7	15.0	4.5%	24.8	22.6	9.6%
South Island	1.6	1.4	16.2%	4.2	3.7	15.6%
Fonterra Australia	8.3	6.5	28.2%	8.3	6.5	28.2%

Fonterra GDT results

This table provides more information on the latest results, including a snapshot of the year‑to‑date results.

	LAST TRADING EVENT	YEAR-TO-DATE
	(15 AUGUST 2017)	(FROM 1 AUGUST 2017)
Quantity Sold on GDT	31,365	63,079
(Winning MT)
Change in Quantity Sold on GDT	(13.7%)	(9.8%)
over same period last year
Weighted Average Product Price	3,387	3,390
(USD/MT)
Change in Weighted Average	22.0%	28.8%
Product Price over same period
last year
Change in Weighted Average	(0.2%)	–
Product Price from previous event

Fonterra GDT Results

This chart shows Fonterra GDT prices and volumes over the past 12 months.

BACK TO SUMMARY

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4,000 40,000
3,600 34,000
3,200 28,000
2,800 22,000
2,400 16,000
SEP 16 OCT 16 NOV 16 DEC 16 JAN 17 FEB 17 MAR 17 APR 17 MAY 17 JUN 17 JUL 17 AUG 17
WEIGHTED AVERAGE PRICE QUANTITY SOLD
QUANTITY SOLD ( MT)
WEIGHTED AVERAGE PRICE (USD/MT)
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9

GLOSSARY

AMF

Anhydrous Milk Fat.

BMP

Butter Milk Powder.

DIRA

Dairy Industry Restructuring Act 2001 (New Zealand).

Farmgate Milk Price

The price for milk supplied in New Zealand to Fonterra by farmer shareholders.

Fluid and Fresh Dairy

The Fonterra grouping of fluid milk products (skim milk, whole milk and cream – pasteurised or UHT processed), concentrated milk products (evaporated milk and sweetened condensed milk) and yoghurt.

GDT

GlobalDairyTrade, the online provider of the twice monthly global auctions of dairy ingredients.

kgMS

Kilogram of milk solids, the measure of the amount of fat and protein in the milk supplied to Fonterra.

LME (Liquid Milk Equivalent)

A standard measure of the amount of milk (expressed in litres) allocated to each product based on the amount of fat and protein (“milk solids”) in the product relative to the amount of fat and protein in a standardised raw milk.

Non‑Reference Products

All other dairy products produced by the NZ Ingredients business.

Reference Products

The dairy products used in the calculation of the Farmgate Milk Price, which are currently WMP, SMP, BMP, butter and AMF.

Season

New Zealand: A period of 12 months to 31 May in each year.

Australia: A period of 12 months to 30 June in each year.

SMP

Skim Milk Powder.

WMP

Whole Milk Powder.

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