Fonterra 2021 Special Meeting Materials

FONTERRA SPECIAL MEETING
9 DECEMBER 2021
CHAIRMAN’S ADDRESS

I’d like to start by thanking all of our farmers for the spirit in which you have engaged
with us on the capital structure review.

One of the strengths of this Co-op is the diverse thinking, experience and perspectives
amongst its members.

We have embraced that diversity in this review.

We have received input from thousands of farmers. Your feedback, ideas and
constructive challenges have strengthened the recommendations, so I hope you all
felt genuinely consulted through the process.

The Board, senior management and 92% of your Co-operative Councillors are united
in the belief that these changes are our best course of action.

Our situation here in New Zealand is changing fundamentally, and we need a capital
structure that maintains a strong Co-op through these changes.

Milk is the lifeblood of our Co-op. Our strategy is focused on New Zealand milk and
our future success relies on our ability to maintain a sustainable milk supply in an
increasingly competitive environment.

It is an environment that is rapidly changing due to factors such as environmental
pressures, new regulations and alternative land uses.

To be successful, Fonterra must be an attractive option to farmers, many of whom
have a choice on where their milk goes.

Farmers leave for different reasons, but one of the most influential ones is the high
level of compulsory investment that’s required to be part of our Co-op.

A capital structure with flexible shareholding would help to level the playing field with
competitors, many of whom are foreign-backed and don’t require farmers to invest
capital.

Stronger financial performance alone is not enough to retain milk. We need a more
level playing field.

If we do nothing, we are likely to see around a 12–20% decline by 2030 based on the
scenarios we have modelled.

Staying stronger together is in all of our interests. Our scale efficiencies lead to better
utilised factories, lower processing costs, and our ability to pay the highest sustainable
milk price.

Our recommended structure gives all farmers a level of flexible shareholding, which is
critical to supporting farmers to join or stay with our Co-op.

The key features of the recommendation are:

• A 33% share minimum – where you would only need to hold one share for
every ~3 kgMS supplied.
• A 4x share maximum – you could hold up to four times your milk supply in
shares. A farmer-only market for shares, with a capped Fund. Farmers
would decide the prices at which they buy and sell shares, without the traded
price being influenced by external investors. The overall limit on the Fund
size would be reduced from 20% to 10%.
• A more inclusive pathway to becoming a Co-op member – as sharemilkers,
contract milkers and farm lessors can hold dry shares.
• On exit from the Co-op, existing shareholders would have up to 15 seasons
to share-down initially, reducing to 10 seasons. New suppliers would have
up to 5 seasons. Associated shareholders would have up to 3 seasons.
• On entering the Co-op, farmers would have up to 6 seasons to reach the
33% share minimum.
• Voting remains based on share-backed milk supply.

There is no perfect answer, but we are confident that this structure will support the
sustainable supply of New Zealand milk that our long-term strategy relies on. One
enables the other, and together they give our Co-op the potential to deliver the
competitive returns that will continue to support our families’ livelihoods from this
generation to the next.

If our recommendations are supported by the necessary 75% of voting farmers, the
changes will take effect once the Board is satisfied that any steps necessary for
implementation have been, or will be, completed.

Part of that is working with the Government on what the changes might mean under
the Dairy Industry Restructuring Act.

I believe we are philosophically aligned with the Government. We both want to see
Fonterra continue to thrive as a New Zealand co-operative and deliver increasing
value for the economy and for farmers.

I have spoken to Minister O’Connor since receiving his letter that was included in the
Notice of Meeting and remain confident that we can find a regulatory framework that
supports the Flexible Shareholding structure.

If the recommendations don’t receive the required level of support, the Board will
consider the result of the vote and then engage with shareholders about next steps. I
expect that the temporary cap on the Fund will remain in effect at least until then.

James I’ll now invite you to address the meeting.

[Chair of the Co-operative Council addresses the meeting]

Thanks James.

Before I ask Brent Goldsack to speak to the resolution, I’d like to make some final
comments of my own.

Changing our capital structure is one of the most profound decisions we will make as
farmers.

At its heart, this review has been about protecting the Co-operative that we have built
together. Building on what we’ve got today and handing it over in a stronger position,
from one generation of Kiwi farmers to the next.

It’s a conversation we need to have now when we have options open to us and when
our Co-op is in a relatively strong financial position.

The easy thing to do as a Board would have been to wait, kick the can down the road,
and leave it for the next set of governors to solve.

That’s not what good governance is about. Collectively we all need to show some
leadership.

At the heart of the conversation is a single decision. Either we are a corporate or a co-
operative. We have to decide what we are.

The current model where we are trying to have a foot in both camps is not sustainable.
If we are only interested in the value of our shares, then we should fully corporatize
right now.

But if we want to be a strong and enduring cooperative, we believe the capital structure
changes we are recommending are the best course of action available.

I fully believe in the potential of this Co-operative.

Fonterra hasn’t always lived up to its promise – we can all agree on that.

But the capital structure conversation isn’t about past mistakes. It’s about enabling the
future of Fonterra.

We need to look up and look out and take a long-term view.

Our aspiration for Fonterra’s future is a Co-op that pays the highest sustainable milk
price and a respectable return on your invested capital.

• Where farmers decide the prices at which they buy and sell shares.
• Where New Zealand’s best dairy farmers choose to belong and commit their
capital.
• Setting the benchmark for milk quality, ethical and environmentally
sustainable farming practices that consumers pay a premium for.

• It’s a Co-op that invests in research and development. Creating new and
interesting products for customers, in response to changing consumer
trends.
• It supports farmers’ efforts to adapt to regulatory changes by being part of
the search for solutions to methane, fresh water and access to skilled labour.
• Where the smartest minds in global dairy choose to work on behalf of its
members.
• It’s a Co-op owned and controlled by kiwi farming families that had the
courage and foresight to form an internationally competitive farmers’ Co-op
of scale.

If that sounds like something you want to be a part of, then I hope you can support the
recommendations.

---

ILT Stadium Southland, Invercargill
9 December 2021

Welcome
Chairman of the Council’s Address
Chairman’s Address
Voting Paper Collection
Closing
Approval of Capital Structure related Amendments
to the Constitution

Chairman’s Address

800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
NZ Milk Supply Scenario
New Zealand Milk Supply
Fonterra Milk Supply
Strategy Base Case
Scenario 1
Scenario 2
5
kgMS
(m)
Source: NZ Milk Supply: Dairy NZ –New Zealand Dairy Statistics 2019-20,Summary of milk production statistics for the last 35 seasons.DCANZ NZ Collections.
Significant and sustained
expansion of dairy
We need to be
prepared for
declining NZ milk
Flattening
NOTE: Y axis
starts at 1b kgMS

6
Fund size thresholds could be exceeded, and/or capital required
for share or unit buy-backs $500m to $1.2b by FY30
More conservative risk settings,such as lower debt targets
anddividend policies
Milk Price could reduce by 6 to 13 cents /kgMSby FY30
May need to close between 12 and 18 plants within our
manufacturing sites, on top of operating costs which would need
to reduce by $100m to $160m by FY30
Harder to attract and retain milk supply and staff; more difficult
to provide scale benefits to farmers

•Share minimum -33% of supply
•Share maximum -4x supply
•Thresholds to support alignment
•Shares could not be exchangedinto units in the Fund
•Farmers set prices for shares in FSM
•Overall limit on Fund size reduced from 20% to 10%
•Sharemilkers,contract milkersand farm lessors can hold
dry shares as associated shareholders
•Existing shareholders would have up to 15 seasons
initially, reducing to 10 seasons
•New suppliers would have up to 5 seasons
•Associated shareholders would have up to 3 seasons
•Up to 6 seasonsfor 33%
•Share-Up Over Time and MyMilkcontracts would no
longer be offered, with all existingcontracts honoured
•1 vote per 1000 kgMSsupplied, backed by shares

8
Farmer Vote on
Preferred Option
Review
Feedback &
Refine Preferred
Option
Further
Consultation
We are
here
Further work
with
Government
Implementation
Yes
Vote
No
Vote
Engage with
shareholders on
next steps*
* The temporary cap on
the size of the Fund is
expected to remain in
effect until then, at least

Chairman -Fonterra Co-operative Council
9

Approval of Capital Structure
related Amendments to the
Constitution