Shareholders’ Council provide report to shareholders

NOVEMBER 2018
INDEPENDENT ASSESSMENT
OF FONTERRA’S FINANCIAL
PERFORMANCE SINCE
INCEPTION

Fonterra Shareholders’ Council Values Review 2018
Fonterra Shareholders’ Council Values Review 2018
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In June your Council engaged Northington Partners to assess
Fonterra’s financial performance since its inception.

This work was in response to a heightened level of commentary
within the supplier base, media and the broader financial
community in relation to the perceived performance of our
Co-op since it was formed in 2001. Council saw benefit in
obtaining an independent and reliable view of actual performance
over the last 17 years based on sound methodology and having
access to relevant financial information.

This report provides a high-level summary of the results that is
clear and accessible to all of our Co-op members. We believe it
will be a useful input into the ongoing discussions about our
Co-op’s continued evolution.

It’s important to note that the review looked at just one part of
the overall returns that Farmers earn - their return on capital
invested in Fonterra. Fonterra’s role is far greater than this - as
set out in the Fonterra constitution. Fonterra exists to maximise
returns to farmers through Milk Price and dividend, and the
standalone performance of the Co-op is therefore only one
component of the overall returns achieved by Fonterra suppliers.

In simple terms, Fonterra effectively operates two businesses.
The Milk Price received by its Farmers is a measure of global
supply and demand for base milk ingredients and the efficiency
of converting that milk into those ingredients, whereas the share
value is a measure of the Co-op’s success in delivering value over
and above the Milk Price through time.

The assessment clearly shows that Fonterra’s financial
performance since inception has been unsatisfactory.

When considered as a stand-alone investment, the average
returns generated by Fonterra since inception are lower than
relevant benchmarks.

The assessment was deliberately restricted to a small number of
key metrics:
• Shareholder Returns – what annual returns have Farmer
Shareholders received from their investment in Fonterra
shares since Fonterra’s inception?
• Financial Performance – what Return on Capital has Fonterra
achieved from the business and how does this compare to
appropriate benchmarks?
• Segment Analysis – does Fonterra earn a higher
Return on Capital from its Value-Add business units?
Northington Partners believes that given the nature of the data
that is available for the full period, these metrics are the best
available and sufficient to provide an over-arching view.
The results are unambiguous. A range of alternative measures was
also examined but incorporating them in the assessment did not
add to or materially change the general conclusions.

Consistent with the agreed scope of the review, Northington
Partners has made no attempt to identify potential explanations
for the results. Nor do they offer any thoughts on possible
changes to improve performance.

Council’s view is that the information provided in this report
should inform a wider discussion between Board, Management
and Shareholders around the continued evolution of our Co-op
and in particular what can be done to ensure ongoing returns
meet, as a minimum, the opportunity cost of Farmers’ capital
invested in the Co-operative.

Notwithstanding the findings of this report, Council remains
firmly of the view that the co-operative structure is the only
structure that will provide for the enduring needs of our
intergenerational farming families. Our three key takeouts are:
1. Fonterra has failed to deliver meaningful returns over and
above the cost of capital since inception. Milk growth over
the past 15 years has been an impediment but is now largely
historical. It is critical that this be addressed to ensure
continued supply of milk and capital.
2. Milk price has and continues to be the greatest driver to on
farm profitability. The Milk Price Manual continues to drive
transparency and efficiency, placing increasing tension on
the business to deliver value over and above this. This is the
most appropriate tension for Farmers as suppliers of milk and
providers of capital. All dairy farmers in New Zealand benefit
from this irrespective of whom they supply.
3. Given the relationship between Milk Price and earnings it’s
important that Shareholders look at the total available for
payout as a true measure of performance over time.
Regards
Duncan Coull
Chairman
Fonterra Shareholders’ Council
*Northington Partners is an independent corporate advisory business. For the
last three years it has supported Council in its review of Fonterra’s annual and
half year results. It does not undertake any other work for Fonterra.
Executive Summary
From the Chairman
This report has been prepared by Northington Partners in conjunction with the Fonterra Shareholders’ Council solely for the purpose of
providing an independent view of Fonterra’s actual performance since its formation. It is based on publicly available information and
discussion with select members of Fonterra’s management. Nothing in the nature of an audit of any of that information has been performed.

In preparing this report Northington Partners and the Fonterra Shareholders’ Council, and their respective directors, councillors, employees
and representatives, have endeavoured to provide accurate analysis and supporting discussion that is not misleading in any way, and to
exercise reasonable care and judgement. However, no liability or responsibility is accepted for any errors or omissions, or for any
consequences arising from the use of, or reliance on, this report.
Metric ExaminedMeasured ByFonterra’s Performance
Shareholder ReturnsWhat was the average Total Shareholder
Return (Change in Share Price + Dividends) since
inception?
$1 invested in Fonterra would be worth
$2.84 today (before taxes), representing a
6.3% p.a. return
Financial PerformanceWhat was the average Return on Capital
Employed since inception and was this in line with
appropriate benchmarks?
Fonterra’s Return on Capital has averaged
6.0% p.a. (post-tax), which is lower than
the assessed benchmark of 6.9% - 7.7% p.a.
Segment PerformanceHow much higher was the Value-Add business
Return on Capital compared to the Ingredients
business, and was this sufficient to compensate for
the increased risks?
The Value-Add business returned 0.2% p.a.
more than Ingredients, significantly below
the 1.3% p.a. premium needed to justify the
increased risk.
Other Contributions to Farmer
Wealth
Farmers should also take into account:
1. The gap has closed between the NZ milk
price and international prices since Fonterra’s
formation.
2. There has been a significant increase in the
Milk Price since the inception of the Milk Price
Manual.
3. The value of farmland has increased since
Fonterra’s formation (even after adjusting for
productivity improvements on-farm).
4. Fonterra’s performance includes the impact of
ongoing support and stability during weak
economic conditions.
Dear Shareholders

Fonterra Shareholders’ Council Values Review 2018
Fonterra Shareholders’ Council Values Review 2018
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An investment in Fonterra shares has earned an average
pre-tax return of 6.3% p.a. since inception. This includes
the returns from both dividend payments and changes in
share value.
COUNCIL’S VIEW
Prior to the introduction of Trading Among Farmers
the value of a Fonterra share was determined by an
independent valuer (appointed by the Shareholders’
Council) who took a forward-looking approach using a
discounted cashflow methodology to determine a range
within which the Board chose the fair value of a share.
The structure of Trading Among Farmers, incorporating the
farmer only Fonterra Shareholders’ Market and the publicly
listed Fonterra Shareholders’ Fund, has facilitated a market
driven price for the fair value of a share.
One of the driving principles of Trading Among Farmers
was to ensure the Co-op had permanent capital to invest
in its strategy, eliminating the redemption risk to which
Fonterra was previously exposed. While Trading Among
Farmers has undoubtedly been a success in this respect,
the question must be asked as to whether this permanent
capital has been invested in assets that are generating an
appropriate risk-adjusted rate of return?
Fonterra has delivered an average post-tax Return on
Capital of 6.0% p.a. since 2001.
Shareholder Returns
What annual returns have Farmer Shareholders received from
their investment in Fonterra shares?
While not directly comparable in terms of risk profile, the
graph below summarises Fonterra’s performance relative
to the NZ sharemarket (NZX 50) as a whole. This shows
that the total Shareholder return for Fonterra has
fluctuated considerably through time, particularly since
2012 when Trading Among Farmers was introduced and
units in the Fonterra Shareholders’ Fund were listed.
Financial Performance
What Return on Capital has Fonterra achieved from the business?
The graph below shows that performance is volatile year-
to-year and is generally negatively correlated with the Milk
Price.
EXPLANATION
Q: Why have you compared Fonterra’s Total Shareholder
Return to the NZ Sharemarket (NZX 50)?
A: This comparison is to provide some general context for
Fonterra’s performance only, and is not meant to suggest
that the two are directly comparable. Arguably Fonterra’s
risk profile means it should be expected to deliver a lower
return than the sharemarket as a whole, but we think the
comparison with the sharemarket helps suppliers put
Fonterra’s performance into context.
Q: Why didn’t you compare Fonterra with other dairy
co-operatives and companies?
A: Fonterra is very different to other entities in the NZ
dairy sector and it’s not possible to accurately adjust for the
fundamental differences in order to provide a meaningful
comparison to most of the other entities. Comparisons
with the total shareholder returns for international dairy
processors are difficult for similar reasons, but also because
most of those businesses are not listed and we can’t
accurately measure share price performance.
A comparison of Fonterra’s performance on the basis of
Return on Capital is set out on page 9.
COUNCIL’S VIEW
Volatility of milk price has had, and will continue to have,
an impact on Fonterra’s earnings from year to year because
the Milk Price is the most significant contributor to cost
of sales. Greater transparency over the determination
of the Milk Price since the introduction of the Milk Price
Manual regime has added to the annual volatility. Farmers
generally understand and accept this relationship.
It is relevant to acknowledge the 45% increase in milk
collections from 1,110 m kgMS (2001/2002) to a peak of
1,614m kgMS (2014/15) since Fonterra’s inception (1,505m
kgMS (2017/2018)). Appropriate investments have had
to be made to accommodate this growth and to find
competitive markets for the increased volume of product
sales, which have largely been very successful.
However, even allowing for some of these contributing
factors, it remains clear that Fonterra has generated lower
returns on capital over recent years. Given the heightened
competition for milk in New Zealand Fonterra needs to
do better in order to earn the trust of Farmers’ milk and
capital.
EXPLANATION
Return on Capital Employed (ROCE) assesses how well
capital has been invested. It is calculated as:
Q: What is the difference between Book and Market
Value, and how does this impact the Return on Capital
Employed (ROCE) calculation?
A: Book value is the value of equity in Fonterra’s financial
statements. Market Value is the value that people are
willing to pay for Fonterra’s equity, as reflected in its
traded share price. As Market Value is typically higher than
Book Value, the ROCE calculation is lower if it is based on
Market Value.
Ideally, ROCE is calculated on Market Value as that is more
representative of the wealth of shareholders invested
in the business. However, when comparing segments or
against competitors who are not listed themselves, Book
Value must be used to ensure consistency.
Return on Capital and Farmgate Milk Price
Post-Tax Return on Capital
%
8%
6%
%
%
%
Farmgate Milk Price (right axis)
Milk Price introduced in  bringing a transparent
framework for determining the Milk Price and earnings
Average Return on Capital Employed
since inception of 6.% p.a.
Return on Capital Employed
Milk Price
Trading among Farmers and the listing of units in
the Fonterra Shareholders’ Fund - November  
FY  FY  FY  FY  FY 6 FY  FY 8 FY
FY FY FY FY FY FY FY6 FY FY8
‰.‰%
Š.%
‰.%
‰.‹%
.%
Š.%
‹.%
.‹%
.%
.8%
‹.Š%
‹.%
6.Š%
‰.6%
6.%
$
$Ž
$‹
$6
$‰
$
$Š
$
$
$-
‹.Š%
‹.%
ROCE = Earnings before interest and tax x ( eective tax rate)
market value of capital employed
Total Shareholder Return
FY FY FY FY FY
FY6 FY FY8 FY FY FY FY FY FY FY
FY6 FY FY8
FonterraNZ Sharemarket (NZX )
Milk Price introduced in  bringing a transparent
framework for determining the Milk Price and earnings
Value of  Invested since
inception (before taxes)
Introduction of Trading Among Farmers
and the listing of units in the Fonterra
Shareholders’ Fund - November 
$‡.‰
.6% p.a.
$.8‡
6.Ž% p.a.
$6
$
$‡
$Ž
$
$
$

Fonterra Shareholders’ Council Values Review 2018
Fonterra Shareholders’ Council Values Review 2018
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EXPLANATION
Segment Analysis
The average post-tax return Return on Capital employed by the
Fonterra business of 6.0% p.a. is materially lower than the estimated
return benchmark range of 6.9% - 7.7% p.a. Average returns on
capital have also deteriorated over the last five years.

This differential is material when considered over the full 17-year
period, amounting to an opportunity cost of over $2 billion in
foregone earnings. In simple terms, this is the gap between the
returns actually achieved by Fonterra and the benchmark cost of
capital over time.

If the impact of the Milk Price improvements since 2009 are added
back, the average Return on Capital Employed over the last 10 years
increases by 0.7% – with this adjustment, the outcome is marginally
higher than the bottom end of the benchmark WACC range.
See Appendix 1 for more detail.
Return on Capital Employed (ROCE) assesses how well capital
has been invested. It is calculated as:
Weighted Average Cost of Capital (WACC) combines the cost
of debt and equity capital that has been used to fund Fonterra’s
business. WACC reflects the return that should have been
earned to compensate investors for the risk associated with their
investment. If:
• ROCE exceeds WACC the company has created
shareholder value.
• ROCE is lower than WACC the business has
underperformed and investors have effectively suffered a
notional loss.

Q: Why have you used a range for the benchmark WACC?
A: There has been significant debate between Fonterra
stakeholders as to what an appropriate cost of capital should be
for the business. Due to this, we believe it is more meaningful
to provide a range for the benchmark WACC, and we have done
this drawing from the wealth of analysis behind all sides of the
debate.
The difference between the low and high points of our
benchmark WACC range is the assumed Asset Beta for the
Value-Add segment of the business: 0.51 at the low point and
0.75 at the high point.
COUNCIL’S VIEW
The opportunity cost of around $2 billion is reflective of the Co-op’s
inability to generate Shareholder value over and above the cost of
capital for its owners. The 28.3 cents increase in the Milk Price since
FY09 arising from Milk Price calculation method changes has been a
key driver of this over the past five years, as has the impact of events
such as the Beingmate impairment and Danone arbitration costs.
Prior to 2009 and the introduction of the Milk Price Manual it could
be argued Farmers were being underpaid for their milk.
A separate assessment of the return from different
segments of the Fonterra business is not straightforward
given ongoing changes to internal reporting structures
and some significant data limitations. However, the
available data does allow an examination of returns for the
Ingredients and Value-Add segments since inception.

The analysis shows that the Value-Add segment of
Fonterra’s business has generated a return that is only
Q: Why was Total Shareholder Return (on page 4) considered
on a pre-tax basis, while Return on Capital was considered on
a post-tax basis?
A: It would generally be preferable to calculate both metrics on a
pre-tax basis as the marginal tax rate for Fonterra’s shareholders
may individually differ. However, our WACC benchmark for Return
on Capital performance is typically determined as a post-tax rate.
It is simpler and generally more accurate to convert the Return on
Capital to a post-tax measure, than it is to convert the WACC to an
equivalent pre-tax measure.
Q: Why is Return on Capital for FY18 different from Fonterra’s
reported FY18 Return on Capital?
A: Our FY18 Return on Capital is based on actual EBIT, while
Fonterra’s reported FY18 Return on Capital is based on normalised
EBIT. In addition, Fonterra’s capital base uses more detailed
(monthly) figures that are not publicly available, while our capital
base is measured using the average of year-end balances.
How does Fonterra’s Return on
Capital compare to appropriate
benchmarks?
Q: Why is Return on Capital calculated on actual rather than
normalised EBIT?
A: Normalised EBIT is used to compare year-to-year performance
by excluding the impact of one-off factors. However, analysis of
performance over a long period of time should include the impact
of these one-off items as they ultimately have resulted in increases
or decreases to Fonterra’s value and therefore the value of shares
in Fonterra.
Q: Why did you use actual EBIT rather than spread one-off
impacts over multiple years?
A: We acknowledge that it may be theoretically more accurate
to spread a one-off impact over the time the impact was accrued
(e.g. spreading the Beingmate impairment across each year since
the FY15 investment). However, this requires assumptions around
the timing of the one-off items and leads to a trade-off between
meaningfulness and complexity. The impact of smoothing these
impacts through time does not have a meaningful impact on the
overall assessed returns.
Does Fonterra earn a higher Return on Capital from its
Value-Add business units?
0.2% p.a. higher than the Ingredients segment.
This premium is far lower than the estimated 1.3% margin
that is required to compensate investors for the higher risk
profile associated with the Value-Add business (based on
the WACC framework). Recent returns in the
Value-Add business segment have been severely affected by
the Beingmate impairment.
EXPLANATION
The above analysis broadly illustrates that Fonterra has
not generated sufficient additional return on its Value-Add
business.

This is important because the Value-Add business units are
now using an increasing share of Fonterra’s capital. For the
first five years since inception (FY02 – FY06), the
Value-Add business accounted for 36% of Fonterra’s
capital. This has increased to 50% of Fonterra’s capital
over the last 5 years (FY14 - FY18).
Segment Post-Tax Return on Capital Employed (based 0n book values) since inception
Segment Return on Capital Employed vs Segment Weighted Average Cost of Capital Benchmark
ROCE - Ingredients
%
 %
%
8%
6%
%
%
%
- %
8%
6%
%
%
%
%
8%
6%
%
%
%
ROCE - Value-Add
Average Ingredients ROCE = 6.
%
Average Value-Add ROCE = 6.%
ROCE WACC ROCE WACC ROCE WACC
Since InceptionLast  YearsLast € Years
ROCE WACC ROCE WACC ROCE WACC
Since InceptionLast  YearsLast € Years
.8%
FY­€ FY­‚ FY­ƒ FY­„ FY­6 FY­† FY­8 FY­ˆ FY‰­ FY‰‰ FY‰€ FY‰‚ FY‰ƒ FY‰„ FY‰6 FY‰† FY‰8
.%
.
%
6.€%
.%
.%
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6.€%
8.%
6.%
‚.8%
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6. %
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.8%
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6.
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8.%
6. %
6.
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6. %
6.%
6.8%
€.6%
6.8%
6.%
.%
6.%

. %
6.6%
6.%
8.%
8.‚%

.
%
Ingredients Post-Tax ROCE WACC
Value-Add Post-Tax ROCE WACC - Low
WACC - High

However, we should also note that recent investment
in consumer brands and other value-add opportunities
represents a long-term proposition that may take some
time to generate the expected outcomes. For example, the
initial investment in China was expected to be loss-making
in its early years, before generating target returns after the
business matures and reaches the required scale. Higher
returns from these investments may yet be realised.
ROCE = Earnings before interest and tax x ( eective tax rate)
market value of capital employed
COUNCIL’S VIEW
Average Post-Tax Return on Capital Employed vs
Weighted Average Cost of Capital Benchmark
%
8%
6%
%
%
%
Fonterra Post-Tax ROCE WACC - Low WACC - High
Since Fonterra’s Inception Last  Years Last ­ Years
Post-Tax WACC
ROCE
Post-Tax WACC
ROCE
Post-Tax WACC
ROCE
6.‚%
6.%
6.%
­.8%
.6%
­.8%
ƒ.ƒ%
6.6%
ƒ.%
Value Gap of .‚% - .ƒ% vs WACC

Fonterra Shareholders’ Council Values Review 2018
Fonterra Shareholders’ Council Values Review 2018
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The differential between the Ingredients segment and Value-Add
segment return on capital is the key metric to consider as opposed
to their individual values. Note that the group return on capital (as
described on page 3) has been calculated based on market values
of capital, but the segment returns have been calculated based on
book values. As a result, the segment returns on capital are both
higher than the group return on capital.
Fonterra’s reported operating segments have changed significantly
since inception in 2001 as outlined in the table below.

A high-level segmentation enables an assessment of Fonterra’s
ability to create value for farmers through operations beyond the
collection, processing and sale of NZ milk.
For the purposes of this Segment Analysis aspect of the
assessment:
- The Ingredients segment means the Commodity business
(including advanced ingredients) in NZ only, plus general
group costs.
- The Value-Add segment means all other businesses,
including Consumer & Foodservice, China Farms and
international milk pools.
We have included an adjustment to reflect assets held by the
Ingredients segment but actually used for the benefit of the
Value-Add segment.

This segmentation was applied due to the historical reporting and
availability of financial information.
ROCE = see explanation on page 6
Benchmarks = WACC as explained on page 6.
EXPLANATION
Major Reporting Change in FY8 Strategic Platforms Introduced in FY

FY FY FY FY FY6 FY FY8 FY FY FY FY FY FY FY FY6 FY
New Zealand
Commodity Segment
(”Ingredients”)
Value-Add Segment
(”Value-Add”)
NZ Milk ProductsIngredients
Commodities
& Ingredients
NZ Milk
Products
Global
Ingredients &
Operations (GIO)
Standard &
Premium
Ingredients
New Zealand
Milk
Consumer
Australia and New Zealand Oceania
Asia
Greater China
Asia / Africa and Middle East AME Asia
Latin America
Fonterra is very different to the other entities operating
in the New Zealand dairy sector due to a range of factors,
and we therefore believe that a direct comparison of each
company’s performance is misleading. Key differences
include:
• Obligation to Supply: Fonterra’s historic obligation
to supply competitors means that it effectively
internalises some production and volume risks on
behalf of its competitors.
• Open Entry vs Catchment: Tatua and Westland
purchase from a very limited catchment with unique
economics. Synlait and OCD have the ability to
change their catchment over time to suit their needs.
Fonterra is however obliged to collect from an
extensive catchment.
• Scale: Fonterra collects approximately 12 times as
much milk as OCD, 25 times as much as Synlait and
102 times as much as Tatua. Given its scale Fonterra is
more exposed to international commodity prices and
market fluctuations.
• Product Mix: The product mix of each of Fonterra,
OCD, Synlait, Westland and Tatua differs – there is a
mix of higher and lower proportions of commodity
products.
Comparable dairy company analysis
Pre-Tax Return on Capital Employed
.%
.%
.%
.%
.%
Since Fonterra’s Inception Last  Years Last  Years
Fonterra Arla Friesland Campina
8.%
8.%
8.%
8.%
6.8%
8.%
.%
.%
.6%
As a result of the clear differences in scale and scope of
the businesses, comparing Fonterra’s performance to its
NZ competitors is generally considered to be potentially
misleading because it is not possible to accurately adjust
for the differences outlined above.
Of the local processors, OCD is arguably the most
comparable to Fonterra because it is the largest
competitor and is predominantly focused on commodity
ingredients. Over the last 10 years OCD has delivered an
average pre-tax Return on Capital Employed of 7.0% p.a.,
which is lower than Fonterra’s equivalent return of
8.3% p.a. over the same period (based on book values.)
Arguably more comparable entities to Fonterra can be
found overseas. The most similar businesses to Fonterra
globally are Arla and Friesland Campina, both farmer
co-operatives (based in Denmark and the Netherlands
respectively) with substantial commodity and consumer
operations. However, neither company is subject to the
same regulatory regime as Fonterra.
Comparison is best measured by pre-tax return on capital
employed to control for tax differences in overseas
jurisdictions.
Based on the book value of Capital Employed for all three
entities, Fonterra’s historical performance has been in line
with Arla, achieving similar returns on capital both since
inception and over the last 10 years. However, Fonterra’s
performance has been significantly lower than Friesland
Campina’s across all comparable time periods.
Source: Company Annual reports
NZ Milk Collections by Share
Fonterra
, kgMS collected in
 /8 season
OCD
8% of
Fonterra Volumes
Synlait

%
Westland

%
Tatua
%

Fonterra Shareholders’ Council Values Review 2018
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The Milk Price Manual was introduced in FY09 to support
a transparent approach for calculating the Farmgate Milk
Price. The calculation methodology for the Farmgate
Milk Price is adjusted each year to ensure that it reflects
a value that an efficient processor would pay for milk,
and is in compliance with the Milk Price Principles in the
Constitution and the milk price requirements in the Dairy
Industry Restructuring Act 2001 (DIRA). These changes
can be split into items attributable to Fonterra
(e.g. efficiency gains) and items attributable to wider
market conditions (e.g. changes in market interest rates).
The cumulative impact of these changes since FY09
is 51.8 cents/kgMS. That means that if no adjustments
were made to the methodology, the FY18 Milk Price
would be 51.8 cents/kgMS lower. Of this total amount,
28.3 cents is attributable to improvements in Fonterra’s
performance and 23.5 cents to wider market conditions.
(We note that the 2018 Milk Price Statement states
Appendix 1 - Impact of Milk Price
Manual Changes
29.6 cents is attributable to Fonterra, but this includes a 1.3
cents impact from a change in Asset Beta, which we view as a
market condition change). While for a standard company these
improvements would increase its earnings, for Fonterra this
effectively represents a 28.3 cents increase in the Milk Price
since FY09. It is therefore important to consider what Fonterra’s
earnings and returns would have been prior to the impact of
these changes to the Milk Price.
We have adjusted the Return on Capital Employed calculation
by adding the improvements in Milk Price back into Fonterra’s
earnings. These results are summarised in the chart below and
show that the impact in some years since FY13 is material.
If these changes to the Milk Price had not been made, Fonterra’s
Return on Capital since inception would increase from 6.0% to
6.4%. Similarly, the Return on Capital for both the last 5-year
period and the last 10-year period would be marginally above
the bottom end of the benchmark WACC range.
We note that this analysis represents an estimate, meant
to provide a general indication of the value transfer, rather
than a precise calculation, due to the following factors:
• Although the changes to the Milk Price calculation
methodology started in FY09, the impact of the
changes did not start being disclosed until FY13.
• A comprehensive breakdown of the changes is only
available for FY16 and FY18. The value of the changes
for other years has been estimated based on Milk Price
Statement disclosures.
• The analysis is based on simplifying assumptions in
relation to the value of capital employed and the
taxation treatment of the incremental earnings.
Return on Capital and Farmgate Milk Price with Adjustments for Milk Price Manual Methodology
Changes Attributable to Fonterra
Post-Tax Return on Capital
%
8%
6%
%
%
%
Adjusted Return on Capital
Total Value $ m $ m $ 6 m $m $m $6m
Return on Capital Employed
Changes made since FY
but not disclosed until FY 
.8c .c .c 6.c .c 8.c
Value of Methodology
Changes Attributable to Fonterra
FY
 FY
 FY
 FY
 FY
6 FY
 FY
8 FY
­ FY€
FY€€ FY€ FY€ FY€ FY€ FY€6 FY€ FY€8
.%
.%
.%
.%
.%
.%.%
.%
.%
.%
.8%
.%.%
.%
6.%
.6%
6.%
.%
.%
8.%
6.%
.%
6.%
Average Post-Tax Return on Capital Employed
(Adjusted for Milk Price Manual Changes)
vs Weighted Average Cost of Capital Benchmark
8%
6%
%
%
%
     6  8 
Fonterra Post-Tax ROCE Adjusted ROCE
WACC - Low WACC - High
6.%
6.%
6.%
.%
.8%
.6%
6.%
.%
6.%
.8%
6.6%
.%
Support/stability in weak economic conditions
The Co-op exists for the benefit of its Farmer Shareholders.
As such, it looks to maximise the sustainable value of the
milk supplied by Shareholders.
From time to time the Co-op provides other benefits to its
Shareholders to support the ongoing sustainability of their
businesses. Recent examples include:
• The Co-op support loan which provided an additional
4 cents per kgMS through relief of working capital on
farm.
• The introduction of the Farm Source model and its
Rewards programme which has rewarded Shareholders
who purchase farm supplies exclusively through Farm
Source stores at around 10 cents per kgMS annually.
• On-farm support through in-house sustainabilty
programmes supporting farmers in developing
comprehensive farm environment plans free of charge
for Shareholders.
The Bigger Picture
Apart from the investment returns, to what extent has Fonterra
directly or indirectly impacted farmer wealth?
Average Sale Price for Dairy Land
2000/012001/022002/032003/042004/052005/062006/072007/082008/092009/102010/112011/122012/132013/142014/15
2015/16
2016/17
$,
$,
$,
$,
$,
$,
$,
$,
,
$
$8
$
$6
$
$
$
$
$
$
Average Land Price per Ha Average Land Price
per kgMS Produced (right axis)
Difference attributable
to productivity gains
.% p.a. growth
6.% p.a. growth
Land value appreciation
Farmers have also benefited considerably from increases
in their land value over the period since Fonterra’s
inception. When considered across all regions, land value
appreciation has averaged 6.0% p.a. for the last
17 years and these capital gains have been a fundamental
driver of improvements in farmer’s net wealth position.
While productivity improvements have contributed
approximately half of this value, some of the benefit can
also reasonably be attributed to Fonterra’s significant role
in the sector.
Milk Price Performance
There has been an historical gap between the milk price
achieved in New Zealand compared to the milk price
received by farmers in the European and US markets.
Since Fonterra’s formation, NZ’s milk prices have
increasingly correlated with these benchmark markets,
and this price gap has now closed.
While it is not possible to gauge the degree to which
Fonterra has explicitly effected this improvement in prices,
Farmer Shareholders should recognise that improvements
in Fonterra’s business may be reflected in stronger Milk
Prices rather than increased earnings as previously
discussed.

The Milk Price Manual has provided a greater level of
transparency of the cost of goods for the business.
The introduction of Global Dairy Trade has provided a true
market signal, both internally and externally, of the market
value for milk off farm.

Council’s view is that the Milk Price model is the greatest
driver of efficiency in the business and the greatest
determinant to on farm profitability.

As Shareholders we should always look to total Shareholder
return as the measure of performance of our Co-op.
Jan-8 Jan-8 Jan- Jan- Jan- Jan- Jan- Jan- Jan-
EU US NZ
Average Milk Prices Achieved
(US per LME)

$.
$.6
$.
$.
$.

$. 
$.
$.
Milk Price Model implemented
Formation of Fonterra
Source: DairyNZ