Fonterra Increases Payout Forecast

MEDIA RELEASE
13 December 2007

Fonterra Increases Payout Forecast

Fonterra Co-operative Group has lifted its forecast payout for the current season by 50 cents, from $6.40 to $6.90 per kilogram of milksolids. The new forecast comprises an increased milk price of $6.70 and the value component remains at 20 cents.

The Board has also set the interim Fair Value Share price for the 2008/09 season at $7.01, an increase of 22 cents on the current Fair Value Share price of $6.79.

Fonterra Chairman, Henry van der Heyden said: “the higher milk price is due to an increase in milk supply which has flowed through to higher sales volumes at higher prices, but the gains have been somewhat offset by the higher New Zealand dollar.

“The value component of the forecast remains the same. This part of the business continues to be impacted negatively by reduced margins which are a direct result of the higher commodity prices. The negative impact is being balanced by improved performance from our overseas investments.”

Mr van der Heyden said the independent valuers, Duff & Phelps, provided the Board with a valuation range for the Fair Value share of $6.49 to $7.54. The interim price of $7.01 is the midpoint of the valuation.

“The net increase in the Fair Value Share reflects some compression of Fonterra Ingredients’ long term margins, driven by the higher dairy prices. However the valuer has recognised that this is more than being made up for by improvements in Fonterra’s consolidated Australian operations and our Soprole business in Chile. The valuer also recognised additional business efficiencies and cost savings initiatives.”

Fonterra CEO, Andrew Ferrier said the Co-operative was just beginning to see signs of some of the expected supply response to the record commodity prices.

“In particular we’re seeing growth in United States skim milk powder production. We think this will factor into the market over the short to medium term and will bring a gradual softening to the market.

“However, structurally the market is much stronger than it has traditionally been.

“There is a very strong global demand for grains, in particular, the large amounts of grains going into biofuels. This is putting upward pressure on global farming costs, which in turn is pushing up global food prices, including dairy. Combine this with the weak US dollar, and we believe the long term outlook for dairy prices will be well above traditional averages,” Mr Ferrier said.

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