Communication to Fonterra farmers

24 June 2021


Communication to Fonterra farmers

The attached communication was provided to Fonterra Co-operative Group Limited farmers by the
Chairman, Peter McBride, on 24 June 2021.

-ENDS-.

For further information contact:

Fonterra Communications
24-hour media line
Phone: +64 21 507 072

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CHAIRMAN’S EMAIL

24 JUNE 2021

Subject: Update from the Chairman: Capital Structure consultation

Dear [name]

I’d like to further update you on some of the capital structure feedback we’ve received so far.
There are a number of consistent themes in your feedback that we are already seeking to
address as we consider what a final proposal could look like.

We’ll provide a more detailed summary of your feedback in July, once the first round of
consultation is complete, but here are a few key themes coming through:

General
• The most common questions we’ve received relate to the share price impacts, both now
during the temporary cap which I provide more context on below, and in the future if we
moved permanently to a farmer-only market.
• Many of you have told us that, before making any decisions related to capital structure,
you’d like more information on where we’re heading in terms of performance and
forecast earnings. We’ve heard you and will be coming out with this.
• We’re also looking at who would be able to buy and hold shares in a permanent farmer-
only market, such as sharemilkers and contract milkers.
• There are mixed views on whether to keep the Fonterra Shareholders’ Fund, including
questions around whether buying it back would be the best use of capital.

Balancing flexibility and alignment
• We’ve heard suggestions to adjust the minimum and maximum shareholdings within a
reduced share structure, which we initially suggested could be 1:4. We are reconsidering
what settings strike the right balance between flexibility and alignment of interests
between shareholders.

Ensuring a fair transition
• We’ve taken onboard your feedback around how to make any transition to a new capital
structure as fair as possible for farmers.
• We’re looking at extending the timeframe in which our current farmers can hold onto
their shares once they retire or cease.

We also want to acknowledge and provide context on the concerns you’ve shared with us
around the current share price.

Throughout this capital structure review, we have acted in the best long-term interests of the
Co-op.

The temporary cap on the size of the Fund was necessary for us to have an open conversation
about all our potential options for change.

That decision is impacting us farmers in different ways. We can see the current reduction in
share price on our balance sheets, which is tough. Some have sold shares for reasons relating
to their own particular circumstances, which would be even tougher.

The current share price and volatility is reflective of the period of particularly unusual trading we
are in right now, brought on by the uncertainty about our future potential capital structure while
we’re consulting on potential changes. Because of that, we’ve put share compliance obligations
on hold for every farmer owner holding at least 1,000 shares. We explained the details around
that on 6 May, when we also said there may be lower levels of trading and increased volatility
while those obligations are on hold. We know that markets like certainty, and this consultation
temporarily takes that away. It’s not easy, but we expect to see a level of volatility continue while
we’re in this consultation phase.

Despite the temporary cap, a number of things remain unchanged. Fonterra is in a strong
financial position and our underlying performance remains consistent with what we shared
during our third quarter update on 26 May.

Our Co-op is at an important point where we need to decide what is most important to us. It’s a
big decision for us all and I encourage you to take a long-term view.

If we’re looking at today’s share price, then we’re feeling the pain of that. Or if we look out to the
next 10 or 20 years, then it’s about maintaining control of our own Co-op and supporting a
sustainable milk supply, which helps protect overall returns.

We’ve extended the first round of consultation by a couple of weeks given there’s still high
levels of engagement and questions coming through. We’ll then spend more time considering
your feedback before shaping up a detailed proposal to present to you for a second round of
consultation.

We’re planning to have another webinar next week and Directors are holding more farmer
meetings through until mid-July (see latest schedule here).

Ngā mihi,

Peter