Fonterra Shareholders' Fund Prospectus and Investment Statement

SECTION 1
About
Fonterra continued
GLOBALDAIRYTRADE
In 2008, Fonterra established an auction
platform for internationally-traded commodity
dairy products called GlobalDairyTrade
(GDT). GDT has become a leading global
price reference indicator for the products
traded. GDT prices are increasingly used as
the basis for calculating the Farmgate Milk
Price that Fonterra pays farmers for milk in
New Zealand.
GDT now includes other global dairy
vendors, with DairyAmerica the first to
join in October 2011. Murray Goulburn (an
established Australian dairy co-operative)
and Arla Foods joined in 2012. In FY2012,
NZ Milk Products generated approximately
30% of its sales through this platform, which
represented over 95% of total GDT sales.
Fonterra is able to achieve higher margins
through the management of product mix
and obtaining prices that are above those
generated on GDT for the five Reference
Commodity Products used in calculating the
Farmgate Milk Price (for further information,
see the text box entitled “Summary of Setting
the Farmgate Milk Price for New Zealand
milk”). Accordingly, to the extent possible,
Fonterra seeks to achieve an optimal product
mix to enhance returns across NZ Milk
Products and its regional businesses. For
further details, please refer to Section 3 –
Setting the Farmgate Milk Price for New
Zealand Milk.
While New Zealand-sourced milk is the
cornerstone of Fonterra’s milk production,
growth in global demand for dairy presents
an opportunity for Fonterra to develop secure
sources of quality milk outside New Zealand.
Fonterra intends to supplement its New
Zealand production with high-quality in
market milk production for its offshore
customers.
OVERVIEW OF GLOBALDAIRYTRADE (GDT)
GDT TM currently provides a market place
for eight different product groups:
• Whole milk powder
• Skim milk powder
• Anhydrous milk fat
• Buttermilk powder
• Casein
• Lactose
• Milk protein concentrate
• Cheddar
GDT TM trading events are conducted as
ascending-price clock auctions run over
several bidding rounds. In each auction a
specified maximum quantity of each
product is offered for sale at a preannounced
starting price. Bidders bid the
quantity of each product that they wish to
purchase at the announced price. If the price
of a product increases between rounds,
to ensure their desired quantity a bidder
must bid their desired quantity at the new,
higher price. Generally, as the price of a
product increases, the quantity of bids
received for that product decreases. The
trading event runs over several rounds with
the prices increasing round to round until
the quantity of bids received for each
product on offer matches the quantity on
offer for the product (as illustrated in the
diagram 1 ). Each trading event typically last
approximately two hours.
While GDT is owned by Fonterra it is
operated at arm’s length, and is open to
other suppliers. GDT is operated by
Charles River Associates. To date
DairyAmerica, Murray Goulburn and Arla
Foods have also sold product on GDT.
Updated contractual arrangements to
reflect this evolution to a multi-seller
platform are in the final stages of negotiation
with Charles River Associates.
Total bids received
Source: GDT
Demand decreases
This is the
price that
all winning
bidders
pay
Price increases
R1 R2 R3 R4 R5 R6 R7
PRICE ANNOUNCED EACH BIDDING ROUND
1 The above diagram is an example for illustrative
purposes only.
Quantity
offered
46