Prospectus - Fonterra

1TABLE OF CONTENTSSUMMARY OF MAIN TERMS OF THE OFFER........................................................................................... 3PROFILE OF THE FONTERRA GROUP ..................................................................................................... 5TRUSTEE’S STATEMENT........................................................................................................................... 9STATUTORY INFORMATION.................................................................................................................... 10FONTERRA SUMMARY FINANCIAL INFORMATION............................................................................... 28FONTERRA FINANCIAL STATEMENTS ................................................................................................... 29AUDITORS’ REPORT ................................................................................................................................ 62FONTERRA GROUP SUMMARY FINANCIAL INFORMATION................................................................. 65GLOSSARY................................................................................................................................................ 66DIRECTORY .............................................................................................................................................. 68APPLICATION INSTRUCTIONS ................................................................................................................ 69APPLICATION FORM ................................................................................................................................ 70INTRODUCTIONThis Prospectus, which is dated 30 January 2009, is for an offer by Fonterra Co-operative Group Limited of fixedrate Bonds.This Prospectus contains important information and should be read in its entirety. Investors should note thatother important information about the Bonds and the Offer is available in the Investment Statement and the TrustDocuments. Copies of these documents can be obtained from 9 Princes Street, Auckland, Private Bag 92032,Auckland 1142.DefinitionsCertain capitalised terms used in this Prospectus have defined meanings which appear in the Glossary section.Other capitalised terms have defined meanings given to them in the Trust Documents. All references to $ are toNew Zealand dollars unless specified otherwise.RegistrationA copy of this Prospectus signed by or on behalf of the Directors of Fonterra, and having attached to it copies ofthe documents and other materials required by section 41 of the Securities Act, has been delivered to theRegistrar of Companies for registration under section 42 of the Securities Act.The documents required by section 41 of the Securities Act to be endorsed on or attached to the copy of thisProspectus delivered to the Registrar of Companies for registration are:• the report of the auditors of Fonterra in respect of certain financial information included in this Prospectus, asset out on pages 62 to 64 of this Prospectus;• the signed consent of the auditors to the auditors’ report appearing in this Prospectus;• copies of the material contracts referred to on page 12 of this Prospectus;• an acknowledgement from NZX to the effect that application has been made to NZX for permission to list theBonds and all requirements of NZX for the listing of the Bonds that can be complied with at that time havebeen duly complied with;• the Trustee’s statement, as set out on page 9 of this Prospectus; and• letters of authority authorising this Prospectus to be signed by the agent of directors of the Issuer (if andwhere appropriate).Offer in New Zealand onlyThis Prospectus does not constitute an offer of Bonds in any jurisdiction other than New Zealand. No action hasbeen taken by Fonterra which would permit an offer of Bonds, or possession or distribution of any offeringmaterial, in any country or jurisdiction where action for that purpose is required (other than New Zealand). Noperson may purchase, offer, sell, distribute or deliver the Bonds, or have in its possession, or distribute to any

2person, any offering material or any documents in connection with the Bonds in any jurisdiction other than incompliance with all applicable laws and regulations.By its subscription for or purchase of the Bonds, each Holder agrees to indemnify Fonterra, each Joint LeadManager, each Co-Manager and the Trustee and each of their respective directors, officers and employees forany loss or liability sustained or incurred by Fonterra, that Joint Lead Manager, that Co-Manager or the Trustee,as the case may be, as a result of the breach by that Holder of the above selling restrictions.You should obtain your own tax advice as the advice contained in this Prospectus is general in nature and maynot apply to your individual circumstances.Listing on NZDXApplication has been made to NZX for permission to list the Bonds and all the requirements of NZX relatingthereto that can be complied with on or before the date of distribution of this Prospectus have been duly compliedwith. However, NZX accepts no responsibility for any statement in this Prospectus.Non-relianceThis Prospectus does not constitute a recommendation by the Joint Lead Managers, the Co-Managers, theTrustee, nor any of their respective directors, officers, employees or agents to subscribe for, or purchase, any ofthe Bonds. None of the Joint Lead Managers, the Co-Managers, the Trustee or any of their respective directors,officers, employees or agents accepts any liability whatsoever for any loss arising from this Prospectus or itscontents or otherwise arising in connection with the Offer.The Joint Lead Managers, the Co-Managers and the Trustee have not independently verified the informationcontained in this Prospectus. In accepting delivery of this Prospectus, the recipient acknowledges that none ofthe Joint Lead Managers, the Co-Managers, the Trustee or their respective officers, employees, agents oradvisers give any warranty or representation of accuracy or reliability and they take no responsibility for it. Noneof them shall have any liability for any errors or omissions (including for negligence) in this Prospectus, and eachrecipient waives all claims in that regard.Each recipient of this Prospectus must make its own independent assessment and investigation of the financialcondition and affairs of Fonterra as it may deem necessary and base any investment decision upon suchindependent investigation.

3SUMMARY OF MAIN TERMS OF THE OFFERIssuer:Description:Joint Lead Managers:Co-Managers:Organising Participant:Opening Date: 9 February 2009.Closing Date: 6 March 2009.Registrar:Aggregate Principal Amount:Currency:Fonterra Co-operative Group Limited (“Fonterra” or “Issuer” or “Company”). Adescription of Fonterra is set out in the Profile of the Fonterra Group on pages5 to 8 and under the heading Description of activities of borrowing group onpage 11.Unsecured, unsubordinated, fixed rate debt obligations of Fonterra.ANZ, a part of ANZ National Bank Limited.BNZ Capital, a division of Bank of New Zealand.ABN AMRO Craigs Limited and First NZ Capital Securities LimitedBNZ Capital, a division of Bank of New Zealand.Computershare Investor Services Limited.Up to $300,000,000 (with the ability to accept unlimited oversubscriptions).New Zealand Dollars.Minimum subscription amount: $5,000 with multiples of $1,000 thereafter.Issue Price:Selling Restrictions:How to apply:Listing and quotation:Maturity Date: 10 March 2015.Status of the Bonds:Interest Rate:$1.00 per Bond (being the “Principal Amount” of each Bond).This Prospectus does not constitute an offer of Bonds in any jurisdiction otherthan New Zealand. No action has been taken by Fonterra which would permitan offer of Bonds, or possession or distribution of any offering material, in anycountry or jurisdiction where action for that purpose is required (other thanNew Zealand). No person may purchase, offer, sell, distribute or deliver theBonds, or have in its possession, or distribute to any person, any offeringmaterial or any documents in connection with the Bonds in any jurisdictionother than in compliance with all applicable laws and regulations.Instructions on how to apply for the Bonds are contained on page 69 underthe heading Application Instructions and in the Application Form.Application has been made to NZX for permission to list the Bonds and all therequirements of NZX relating thereto that can be complied with on or beforethe date of distribution of this Prospectus have been duly complied with.However, NZX accepts no responsibility for any statement in this Prospectus.The Bonds offered under this Prospectus are debt securities and constituteunsecured, unsubordinated, fixed rate debt obligations of Fonterra. TheBonds will rank equally and without any preference among themselves andequally with all other unsecured and unsubordinated indebtedness ofFonterra, except indebtedness preferred by law.The Bonds offered under this Prospectus shall pay interest at the InterestRate. The Interest Rate for the Bonds will be set by Fonterra in consultationwith the Joint Lead Managers on the Interest Rate Set Date at the higher of:• 7.75%; and• the aggregate of the applicable Six-Year Swap Rate (on the Interest RateSet Date) plus a margin of 3.40%.Accordingly, the Interest Rate for the Bonds is not known at the date ofregistration of this Prospectus. The Interest Rate for the Bonds will beannounced by Fonterra to NZX on the Interest Rate Set Date. The InterestRate applicable to each Bond will not change after that Bond has been issued.Interest Payment Dates: Interest will be payable quarterly in equal amounts in arrears on 10 March, 10June, 10 September and 10 December of each year up to and including theMaturity Date. The first Interest Payment Date is 10 June 2009.

4Scaling:Firm Allocation:Underwriting:Form of Bonds:Interest will be payable on each Interest Payment Date to the Holders as atthe Record Date immediately preceding the relevant Interest Payment Date.A Record Date is the date 10 days before an Interest Payment Date or, if nota Business Day, the immediately preceding Business Day.Fonterra will pay, no later than 14 days after the Issue Date, interest to eachHolder on the Subscription Moneys in respect of Bonds allotted to that Holderat the Interest Rate for each day in the period from (and including) the date onwhich the Subscription Moneys were credited in cleared funds to Fonterra’sbank account to (but not including) the Issue Date.The Joint Lead Managers in consultation with Fonterra reserve the right toscale at their discretion.Up to $300,000,000 in Principal Amount of Bonds (constituting 100% of theBonds offered) and up to 100% of any oversubscriptions may be reserved forfirm allocations to clients of the Joint Lead Managers, the OrganisingParticipant, the Co-Managers, other NZX Firms and invited financialintermediaries in the bookbuild as determined by the Joint Lead Managers.The Offer is not underwritten.The Bonds will be entered onto the Register maintained by the Registrar. Nocertificates in respect of the Bonds will be issued to Holders. Title to theBonds passes by transfer and registration. Fonterra and the Registrar will relyon the Register for the purpose of determining entitlements to interest on eachInterest Payment Date, and for the repayment of the Principal Amount of theBonds when they are redeemed.Ratings: Standard & Poor’s (Australia) Pty Limited (“S&P”) has assigned a rating of A+to the Bonds. Further information about the rating is available atwww.standardandpoors.com. Fitch Australia Pty Limited (“Fitch”) hasassigned a rating of AA- to the Bonds. Further information about the rating isavailable at www.fitchratings.com.Use of proceeds:Further issues:Alteration of dates:The ratings referred to in this Prospectus are not a recommendation to buy,sell or hold the Bonds, and each rating may be subject to revision orwithdrawal at any time by S&P or Fitch, as the case may be. Any downwardrevision or withdrawal of a rating may have an adverse effect on the marketprice of the Bonds.Neither S&P nor Fitch have been involved in the preparation of thisProspectus.The net proceeds from the issue of Bonds will be used for general businesspurposes, including working capital requirements.Fonterra may from time to time without the consent of the Holders issuefurther notes so as to form a single class with the Bonds. Fonterra may alsofrom time to time without the consent of Holders issue notes having differentterms to those applicable to the Bonds. There is no restriction on the amountof debt which Fonterra may issue or guarantee.Fonterra, in conjunction with the Joint Lead Managers, may change the datesapplicable to the Offer and the Bonds referred to in this Prospectus prior to theIssue Date. If Fonterra changes the Closing Date for the Offer, the Issue Datewill be altered accordingly and the Interest Rate Set Date will be the BusinessDay prior to the Issue Date as altered. The Maturity Date will be the sixthanniversary of the Issue Date as altered. The Interest Payment Dates will fallon every 3 month anniversary of the Issue Date as altered up to and includingthe Maturity Date.

5PROFILE OF THE FONTERRA GROUPFor the purposes of the Securities Regulations, Fonterra is the issuer and is the only member of the borrowinggroup in relation to the Bonds. However, most of the business activities of Fonterra are carried out by itsSubsidiaries (which together with Fonterra are referred to as the “Fonterra Group”) and accordingly theinformation contained in this profile relates to the Fonterra Group as opposed to solely Fonterra. No Subsidiaryguarantees the obligations of Fonterra in respect of the Bonds.OverviewThe Fonterra Group is the world’s largest dairy exporter and New Zealand’s largest and truly multinationalbusiness, currently responsible for around one quarter of New Zealand’s export earnings.Its core business is the collection of milk and the manufacture and sale of dairy ingredients, both commodity andspecialty, which are sold in the globally-traded dairy market. It is the world’s largest seller of globally-traded dairycommodities (milk powders, proteins, butter, milk fats and cheese).The Fonterra Group’s product portfolio covers dairy ingredients, liquid and powdered milks, cultured foods andyoghurts, butter, cheese and specialty foodservice products. Its brands include ANCHOR, ANLENE, ANMUM,FRESH ‘N FRUITY, MAINLAND, KAPITI, PETERS, BROWNES, SOPROLE, TIP TOP and CHESDALE.Fonterra is the parent company of the Fonterra Group which includes around 70 trading companies throughoutthe world and has around 16,000 employees.OwnershipAs a co-operative, Fonterra is owned by around 10,500 New Zealand dairy farmer shareholders. These farmers –all members of the co-operative – supply the Fonterra Group with raw milk for processing into a range of dairyproducts, over 90% of which are exported to more than 140 countries.Share ownership is restricted to the New Zealand dairy farmers who supply milk to Fonterra. Shares are heldlargely in direct proportion to the amount of milk supplied in a 12-month dairy season. Changes in the quantity ofmilk supplied from one season to the next must, in most cases, be accompanied by a proportionate change inshareholding.Business Structure and OperationsThe Fonterra Group’s business has several key components:• Dairy supply, collection, manufacturing and supply chain – predominantly in New Zealand, but also inoffshore markets.• Global trading and supply of commodity dairy products.• Sales of dairy ingredients (including specialty ingredients) to key customers around the world.• Regionally-focused consumer dairy businesses within Australia/New Zealand; Asia/Africa, Middle East; andLatin America. As well, Fonterra operates through a number of joint venture arrangements, partnerships withother suppliers and customers, and product sourcing arrangements such as the arrangement it has withDairy Farmers of America.Supply and ManufacturingMilk in its natural form is perishable and so its distribution as a liquid is largely limited to local marketconsumption. The Fonterra Group processes approximately 95% of its annual milk production into lessperishable forms such as dried powder formats for both milk powder and protein products, UHT milk, various foodingredients, and butter and cheese.The Fonterra Group’s New Zealand and international manufacturing assets are core to its business. With 26processing sites in New Zealand, 10 in Australia and another 50 around the world, the Fonterra Group has thescale to process around 20 billion litres of milk a year. The Fonterra Group’s scale and range of manufacturingplants means it is well suited to take account of changing market demands which may impact product mix andreturns.These assets include the world’s largest dairy ingredients manufacturing site in Whareroa, Taranaki which aloneprocesses approximately 20% of the milk collected by Fonterra in New Zealand. On this site are five powderplants, two cheese plants and plants producing cream products, casein and whey.A $212 million investment in additional milk powder production and support facilities at the Fonterra Group’sEdendale site in Southland will bring that site’s peak processing to more than 14 million litres a day, a levelcommensurate with the Whareroa site. When complete, the powder drier at Edendale will be the largest in theworld.The Fonterra Group is focused on improving its operational performance in key areas such as quality, costefficiency and sustainability. Product quality has improved continuously over the past seven years, whileincremental cost reduction initiatives have achieved cost savings over recent years. The core business includes a

6Global Supply Chain function that enables products sourced from around the world to be delivered to customersacross 140 countries.GlobalTradeThe Fonterra Group’s GlobalTrade business is one of the world’s largest sellers of bulk dairy commodities (milkproteins, powders, cream and butter products and cheese). Nestlé is one of GlobalTrade’s key customers.GlobalTrade has a key role to monitor international supply and demand trends in a manner that allows sales andproduction planning for the Fonterra Group to be optimised in support of achieving a competitive milk price to bepaid to dairy farmer shareholders. As a matter of course, this includes planning the allocation of product mix andthe extent of inventory held in support of such plans.In July 2008, the Fonterra Group established the world’s first internet trading platform to sell bulk dairycommodities into the international market. Branded as globalDairyTrade, the Fonterra Group intends at theoutset to sell approximately 10% of its commodity production through this trading platform. Total sales throughthe trading platform and the types of commodity products sold through it are expected to expand over time.IngredientsFonterra Ingredients is responsible for products sold to a range of global account customers, including those inthe formulated foods sector – such as infant formula manufacturers. Customers include some of the biggestnames in the food and nutrition industries: Abbott, Coca-Cola, Danone, Domino’s Pizza, Kraft, Mars, McDonalds,Mead Johnson, Wyeth and Yum! (the owner of KFC and Pizza Hut).Utilising its worldwide network and market leverage, the business delivers world-class products and servicethroughout the globe. For customers operating in multiple markets, the Fonterra Group can provide a singlesource supply chain of dairy ingredients supported by world-proven marketing expertise, technology and researchcapabilities.The specialised local knowledge and experience of the Fonterra Group’s network of regional office staff memberscan add real value to customers’ businesses. From language to logistics, the Ingredients business has a localunderstanding of the markets that it serves.Australia/New ZealandThe Fonterra Group’s Australia/New Zealand business is one of the largest food businesses in Australasia. Itcomprises consumer-related operations in New Zealand, and in Australia covers the full value chain, includinglocal milk collection, manufacturing and ingredients, and consumer and foodservice businesses.In New Zealand, the Fonterra Group leads in all consumer dairy categories, with icon brands such as MAINLAND,PERFECT ITALIANO, ANLENE, ANCHOR, FRESH ’N FRUITY, KAPITI and TIP TOP.In Australia, the Fonterra Group has national market leading positions in cheese and spreads, a leading positionin yoghurt and dairy desserts, as well as small regional positions in milk and ice-cream.Asia/Africa, Middle EastThe Asia/Africa, Middle East and China businesses stretch across 40 countries with a combined population ofmore than 2 billion. The South East Asian businesses are focused on seven dairy categories and aim to beleading nutritional dairy players and providers of foodservice solutions in each of their regions. Leading brandsinclude ANCHOR, ANLENE and ANMUM. With a strong pipeline of product innovation, leadership positions havebeen created in Malaysia and Sri Lanka in chilled and cultured categories. The operations in Sri Lanka are thelargest consumer business in that country. The ANLENE brand is a market leader in several major countries: it isfocused on bone nutrition, has developed a leading global association with the World Osteoporosis Society andthe business is spearheading bone scanning for consumers throughout the region. In China, the Fonterra Groupis a leader in the imported ingredients and foodservice sectors and has invested in and manages a 3000 cowdairy farm.Latin AmericaThe Fonterra Group’s Latin American business operates in Argentina, Brazil, Chile, Colombia, Ecuador andVenezuela. Key investments include:• 99.8% ownership of Soprole, Chile’s leading consumer dairy business. Soprole has a share of more thanone-third of the Chilean consumer dairy market. Soprole also has a manufacturing subsidiary in southernChile, Prolesur, in which Fonterra has an indirect 86.2% ownership.• A consumer joint venture with Nestlé, Dairy Partners Americas, which operates in Brazil, Venezuela, Ecuadorand Argentina.• A manufacturing joint venture with Nestlé, Dairy Partners Americas Manufacturing, which operates at anumber of sites across Brazil, Argentina, Colombia and Ecuador.

7Innovation and SustainabilityThe Fonterra Group is committed to developing innovative processes, food ingredients and consumer products.Innovation teams operate purpose built research and development facilities situated at Palmerston North, NewZealand and Melbourne, Australia. These teams work in close collaboration with various New Zealand andoverseas universities and New Zealand Crown Research Institutes, and fund work at overseas researchorganisations and universities.The Fonterra Group also operates Technical Centres of Excellence in support of its manufacturing plants and inmarketDevelopment Centres that work in close collaboration with customers requiring dairy ingredient applicationsolutions. This includes a Development Centre in Chicago, United States, which opened in 2008 and allows moreinnovations to be tailored specifically to the needs of the Fonterra Group’s customers in North America.Sustainability is a cornerstone of the Fonterra Group’s strategy. Priorities are managing the quality and efficientuse of water resources, achieving world-leading status as one of the most greenhouse gas-efficient dairyproducers in the world, and reducing waste in every area of the business. Other sustainability initiatives arefocused on transport, infrastructure and bio-security.Fonterra StrategyDairy is a global growth business, with long-term growth trends driven by rising demand for healthy and nutritiousproducts, increasing wealth in developing countries and recognition of dairy’s role in promoting and protectinghealth.Fonterra’s vision is to ‘Lead in Dairy’.Fonterra’s strategy is focused on delivering a competitive milk price to Fonterra’s dairy farmer shareholders anddelivering growth in earnings. It has five strategic platforms:• Driving profitability in Fonterra’s core commodity business and maintaining a competitive milk price to itsdairy farmer shareholders.• Developing deeper relationships with Fonterra’s major ingredients customers globally and regionally.• Continuing to globalise Fonterra’s sourcing and supply chain model to support these relationships.• Becoming the market leader in managing risk and security of dairy ingredients supply.• Maximising value from Fonterra’s consumer positions to fund growth and provide a commodity price hedge.These platforms are underpinned by a focus on the people, processes and infrastructure required to enablegrowth and achieve efficiencies through the scale of the business. An increased focus has also been applied tothe Fonterra Group’s sustainability practices – predominantly in relation to energy, water and wider environmentalfactors.Capital Structure ReviewThe Fonterra Board of Directors regularly looks to ensure that Fonterra’s capital structure is appropriately robustand responsive to the needs of Fonterra shareholders and other stakeholders. A range of options, including apreferred option, were presented to shareholders at the end of 2007. The preferred option involved theintroduction of external capital.Following detailed consultation, the Fonterra Board indicated to shareholders that the preferred option would notbe pursued. The Fonterra Board continues to look at capital structure issues but there are no proposals due to goto Fonterra’s shareholders. Any proposal would be the subject of extensive consultation with Fonterrashareholders.

SOME OF FONTERRA GROUP’S BRANDS8

10STATUTORY INFORMATIONThe order of this section of the Prospectus follows the order of the Second Schedule of the Securities Regulations1983.1 MAIN TERMS OF THE OFFERThe name of the issuer is Fonterra Co-operative Group Limited. Fonterra’s registered office is:9 Princes StreetAucklandA summary of the main terms of the Bonds is provided on pages 3 and 4 of this Prospectus.Bonds of an aggregate Principal Amount of up to $300,000,000 with the ability to accept unlimitedoversubscriptions are being offered by Fonterra. Accordingly there is no maximum amount of Bonds beingoffered. The Issue Price of each Bond will be $1.00 (being the Principal Amount of each Bond).2 NAME AND ADDRESS OF OFFERORNot applicable.3 DETAILS OF INCORPORATION OF ISSUERFonterra is a co-operative company, incorporated under the Companies Act and simultaneously registered underthe Co-operative Companies Act 1996 on 16 October 2001. Its registered number is 1166320.The public file relating to the incorporation of Fonterra is kept at the Companies Office, Business and RegistriesBranch, Ministry of Economic Development and can be accessed on the Companies Office website atwww.companies.govt.nz.4 GUARANTORSNeither the redemption of, nor the payment of interest on, the Bonds is guaranteed by any of Fonterra’s Directors,Subsidiaries, or by any other person.5 DIRECTORATE AND ADVISORSThe Directors of Fonterra are:Colin Charles Armer13C Ocean Beach RoadMt MaunganuiMalcolm Guy Bailey134 Pharazyn RoadB Ag Econ (Massey) RD 7FeildingJohn Charles BallardMBA1/71 Kirribilli AvenueKirribilliNSW 2061AustraliaIan James Farrelly723 Pokuru RoadB.Ag. (Massey) RD 5Te AwamutuGregory William GentDavid Alexander JacksonM.Com. (Hons), FCAJohn Anthony MonaghanMitchells RoadRD 2Ruawai761 Riddell RoadGlendowieAuckland56 Alfredton RoadEketahuna

11Stuart John NattrassB AG SC Hons (Lincoln)75 Harakeke StreetChristchurchHenry van der Heyden76 Cherry LaneBE (Hons) RD 3HamiltonJim William van der PoelRalph Graham WatersCP ENG, FIE AUST, M Bus1 Hams RoadRD 3 Ohaupo6 Holland RoadBellevue HillNSW 2023AustraliaJohn Speer Wilson143 Cruikshank RoadB AG SC (Massey) RD 5Te AwamutuNone of the Directors of Fonterra are an employee of Fonterra or any Subsidiary of Fonterra.The Trustee of the Bonds is The New Zealand Guardian Trust Company Limited. The Trustee’s address,together with the names and addresses of Fonterra’s auditors, the Registrar, the Joint Lead Managers, the Co-Managers and any bankers, sharebrokers or solicitors who have been involved in the preparation of thisProspectus are set out in the section of this Prospectus entitled Directory on page 68.5ARESTRICTIONS ON DIRECTOR’S POWERSThe Constitution of Fonterra provides that the Directors may not:• make any distribution to shareholders unless immediately after the distribution it satisfies the solvency testset out in the Companies Act 1993;• take any action affecting the rights, privileges, limitations or conditions of any interest group (being a group ofshareholders with similar or identical rights), without the sanction of a special resolution of that interest group;and• authorise any payment for loss of office, making of loans or giving of guarantees by Fonterra for debtsincurred by a Director in his or her capacity as such, without the prior approval of shareholders.The Companies Act contains a number of other provisions which could have the effect, in certain circumstances,of restricting the powers of Directors. For example, the Directors must not allow Fonterra to enter into any majortransaction (as that term is defined in the Companies Act) without the prior approval of a special resolution ofshareholders. These provisions are common to any company registered under the Companies Act.6 DESCRIPTION OF ACTIVITIES OF BORROWING GROUPFor the purposes of the Securities Regulations, Fonterra (as the issuer) is the only member of the borrowinggroup in relation to the Bonds. No Subsidiary guarantees the obligations of Fonterra in respect of the Bonds.Fonterra has been operating in its current form since 16 October 2001. Fonterra’s principal activities (as distinctfrom those of its Subsidiaries) are to collect milk from supplier shareholders and sell it to Subsidiaries, andoversee and support the operations of the Fonterra Group. Fonterra also pays the supplier shareholders for themilk supplied, and also pays the profit (known as “Value Return”) made by the Fonterra Group to shareholders.The Subsidiaries treat and distribute milk and cream and manufacture, market and sell milk products. TheFonterra Group processes around 90% of New Zealand’s milk supply.Fonterra’s core business is the collection of milk and the manufacture and sale of commodity and specialty dairyingredients which are mostly sold in the globally-traded dairy market, which it largely carries out through itsSubsidiaries. This market represents around 7% of world milk production, with the Fonterra Group representingaround a 35% share of this globally traded market. 1 The balance of market demand for dairy is typically satisfiedthrough local domestic supply within countries. The Fonterra Group carries out its business through strategicbusiness units that are defined by its core ingredients business and businesses operating in geographical areas:Commodities and Ingredients; Australia/New Zealand (“ANZ”); Asia/Africa and Middle East (“AME”); and LatinAmerica.The Fonterra Commodities and Ingredients business comprises New Zealand Milk Supply, New ZealandManufacturing, Sales and Operations Planning, Fonterra GlobalTrade, Global Supply Chain, Fonterra Ingredientsand Specialty Ingredients. Fonterra GlobalTrade is one of the world’s largest sellers of bulk dairy commodities(milk proteins, powders, cream and butter products and cheese) with sales primarily into Asia, the Middle East,1 Fonterra analysis based on OECD Milk Production data and the World Trade Atlas trade data.

12Africa, Latin America and Oceania. Fonterra Ingredients sells dairy ingredients into North America, Europe andNorth Asia. The Fonterra ANZ business represents operations in New Zealand (other than those covered underthe Commodities and Ingredients business) and in Australia covers the full value chain. The Fonterra AMEbusiness covers operations in Asia, Africa and the Middle East, mainly focused on consumer brands and foodservice. The Latin America business is focused largely on consumer investments and a joint venture with Nestléin the Dairy Partners of America Alliance and certain equity accounted investments in South America.The Fonterra Group’s brands include ANCHOR, ANLENE, ANMUM, MAINLAND, SOPROLE, CHESDALE, TIPTOP, PETERS, BROWNES, BEGA and FRESH ’N FRUITY.7 SUMMARY OF FINANCIAL STATEMENTSFonterra summary financial informationSummary financial information required to be included in this Prospectus by the Second Schedule of theSecurities Regulations in respect of Fonterra (being the only member of the borrowing group for the purposes ofthe Securities Regulations) is set out on page 28 of this Prospectus.Fonterra Group summary financial informationMost of the business activities of the Fonterra Group are carried out by Fonterra through its Subsidiaries.Fonterra’s principal activities (as distinct from those of its Subsidiaries) are to collect milk from suppliershareholders and sell it to Subsidiaries, and oversee and support the operations of the Fonterra Group. Fonterraalso pays the supplier shareholders for the milk supplied, and also pays the profit (known as “Value Return”)made by the Fonterra Group to shareholders. The Subsidiaries treat and distribute milk and cream andmanufacture, market and sell milk products.Therefore, to assist in understanding the financial information for Fonterra, additional summary financialinformation for the Fonterra Group is set out on page 65 of this Prospectus. However, no Subsidiary guaranteesthe obligations of Fonterra in respect of the Bonds.8 ACQUISITION OF BUSINESS OR SUBSIDIARYNot applicable.9 MATERIAL CONTRACTSThe following material contracts, within the meaning of the Securities Regulations (not being contracts enteredinto in the ordinary course of business), have been entered into by Fonterra within the two year period prior to thedate of registration of this Prospectus, along with other relevant material contracts which have been entered intoby Fonterra, which are described for completeness:Trust DocumentsOn 18 November 2002 Fonterra and the Trustee entered into the Master Trust Deed pursuant to which theTrustee agreed to act as trustee for the holders of any notes issued by Fonterra, pursuant to a supplemental trustdeed, on the terms set out in that Master Trust Deed. The Master Trust Deed contains certain terms andconditions of the Bonds.On 29 January 2009 Fonterra and the Trustee entered into the Supplemental Trust Deed (No. 10) in connectionwith the Bonds, which sets out additional terms and conditions of the Bonds.10 PENDING PROCEEDINGSNot applicable.11 ISSUE EXPENSESIssue expenses, including brokerage, legal, accounting, audit, registry, printing, distribution and promotionexpenses, Joint Lead Managers’ and other fees, are estimated to be $7,200,000 (based on an issue of$300,000,000 of Principal Amount of Bonds) and are payable by Fonterra. This estimate includes brokerage(described below) of $5,125,000.The brokerage is calculated and to be paid as follows:• Financial intermediaries will be paid a brokerage fee of 1.00% of the aggregate Principal Amount of Bondsallotted pursuant to each valid application submitted by that financial intermediary bearing its stamp(“Brokerage”). Brokerage paid on each valid application will be capped at $40,000 unless otherwise agreedwith the Joint Lead Managers.

13• Approved financial intermediaries will also be paid a firm allocation fee of 0.50% of the aggregate PrincipalAmount of Bonds allotted pursuant to valid applications bearing that approved financial intermediary’s stampand submitted under the firm allocation of Bonds for that approved financial intermediary (“Firm AllocationFee”).• Any Joint Lead Manager or Co-Manager that has valid applications bearing its stamp will, subject to agreedminimum thresholds, in addition receive a fee of 0.25% of the aggregate Principal Amount of Bonds allottedpursuant to valid applications bearing its stamp (“Manager Fee”).• The Brokerage, Firm Allocation Fee and Manager Fee will be paid by Fonterra to the Joint Lead Managers asa selling commission, which the Joint Lead Managers will in turn pay to the relevant financial intermediariesin the relevant amounts.12 RANKING OF SECURITIESThe Bonds offered under this Prospectus are debt securities and constitute unsecured, unsubordinated, fixed ratedebt obligations of Fonterra. The Bonds will rank equally and without any preference among themselves andequally with all other unsecured and unsubordinated indebtedness of Fonterra, except indebtedness preferred bylaw.As the Bonds are unsecured, unsubordinated debt obligations, in a liquidation, receivership or statutorymanagement of Fonterra, the Holders’ rights to payment of any Bonds will rank after the claims of:• persons to whom preferential payments must be made (including creditors of Fonterra preferred by law); and• secured creditors.Claims of the Holders will thereafter rank equally with the claims of all other unsecured, unsubordinated creditorsof Fonterra.As at 31 July 2008, Fonterra had no securities secured by a mortgage or charge over any of the assets ofFonterra. Therefore, as at 31 July 2008, the aggregate amount of securities that are secured by a mortgage orcharge over any of the assets of Fonterra is $0.13 PROVISIONS OF TRUST DEED AND OTHER RESTRICTIONS ON BORROWING GROUPThe Bonds will be constituted by, and issued pursuant to, the Master Trust Deed dated 18 November 2002 andthe Supplemental Trust Deed dated 29 January 2009, each entered into between Fonterra and the Trustee. TheSupplemental Trust Deed and (except to the extent that it is modified by the Supplemental Trust Deed) the MasterTrust Deed contain the conditions of the Bonds. The Trust Documents are available for inspection at the placesindicated in the section Places of inspection of documents on page 19 of this Prospectus.IntroductionThe following is a summary of the principal provisions of the Master Trust Deed. Investors requiring furtherinformation should refer to the Trust Documents. Holders are bound by, and are deemed to have notice of, theprovisions of the Trust Documents relating to the Bonds which they own.The Trustee and the HoldersThe Trustee is appointed under the Master Trust Deed to act as trustee for the Holders and the holders of anyfurther Series of notes issued under the Master Trust Deed and any relevant supplemental trust deed.The Trustee does not guarantee the payment of interest on, or the repayment of the Principal Amount of, theBonds.Issue and form of the BondsThe Master Trust Deed does not create any security over the assets of Fonterra or any of its Subsidiaries.The Master Trust Deed provides that Fonterra may issue notes at such times, in such amounts, to such persons,on such terms and conditions and at the prices determined by Fonterra. Without limiting the above, the MasterTrust Deed provides that Fonterra can issue notes with a fixed or reducing Principal Amount or a PrincipalAmount that is to be calculated by reference to an index, and, where the Bonds are interest-bearing, that interestwill be calculated by reference to a specific interest rate (which may be fixed or floating) or by reference to anindex or both. In addition, the Master Trust Deed provides that notes are unsecured and may be subordinated orunsubordinated, as specified in the relevant supplemental trust deed.Creation of charges and ratiosThere are no provisions in the Trust Documents which impose limitations relating to:

14• the creation of new mortgages or charges ranking in point of security ahead of, or equally with, any mortgageor charge securing the Bonds; or• any ratio of liabilities, or of any class of liabilities, to assets, or to any class of assets, of Fonterra.UndertakingsThe Master Trust Deed contains a number of undertakings by Fonterra, including that for so long as any notes areoutstanding:• it will comply in all material respects with and perform all material obligations under each Agency Agreementand use all reasonable endeavours to ensure that the Registrar also does so;• it will promptly notify the Trustee of the occurrence of any Event of Default;• it will comply with the Supplemental Trust Deed;• it will ensure that a Register is maintained in respect of each Series and give notice to the Holders of anyresignation or removal of the Registrar and the appointment of any replacement Registrar;• it will obtain, effect and promptly renew all material authorisations required under any applicable law toperform and comply fully with the terms and conditions of the Bonds or required for the validity orenforceability of the Trust Documents;• it will send to the Trustee copies of all notices given by it to the Holders; and• it will comply with the Securities Act and the Securities Regulations.In addition to the above undertakings, the Supplemental Trust Deed contains further undertakings by Fonterrathat for so long as the Bonds are outstanding:• it will punctually comply with all laws (including laws relating to the environment and the payment of taxes)binding upon it the non-compliance with which is likely to materially adversely affect the general interests ofHolders;• it will use all reasonable endeavours to ensure that the Bonds are, upon their issue, quoted on the NZDX andthat such quotation is maintained; and• it shall not, and shall procure that none of its Principal Subsidiaries (as defined in the Trust Documents) will,create or permit to subsist any Security Interest upon the whole or any part of its present or futureundertaking, assets or revenues (including uncalled capital) to secure any Relevant Indebtedness (as definedin the Trust Documents) without:ooat the same time or prior thereto securing the Bonds equally and rateably therewith to the satisfaction ofthe Holders; orproviding such other security for the Bonds as may be approved by an Extraordinary Resolution of theHolders.Duties and powers of the TrusteeThe principal rights and obligations of the Trustee under the Master Trust Deed in relation to the Holders aresummarised as follows:• upon the occurrence of any Event of Default specified in the Master Trust Deed, the Trustee may, andimmediately upon being directed to do so by an Extraordinary Resolution of the Holders must, declare theBonds to be immediately due and payable by notice in writing to Fonterra, exercise the powers ofenforcement available to it and apply all moneys received in accordance with the provisions of the MasterTrust Deed;• to receive regular financial statements and annual reports provided to it by Fonterra or the auditors ofFonterra;• to perform a number of functions relating to the ongoing administration of the Trust Documents, including inrelation to the meetings of Holders, and the exercise of discretions or the giving or withholding of consents(as appropriate) relating to such administration and other matters out of the ordinary, such as making anapplication to the High Court of New Zealand under the Securities Act, the substitution of an obligor in placeof Fonterra in relation to the Bonds and agreeing to modifications of the Trust Documents, all upon the termsset out in the Trust Documents; and• on being satisfied that all sums owing and outstanding in respect of the Bonds have been paid or provided forupon the terms of the Trust Documents, to execute a deed of release of the Trust Documents.

15In addition, the Trustee has a statutory duty pursuant to the Securities Act and the Securities Regulations toexercise reasonable diligence to:• ascertain whether or not there has been any breach of the terms of the Trust Documents or of the terms andconditions of any offer of the Bonds and to do all it is empowered to do to cause any such breach of thoseterms to be remedied (except where the Trustee is satisfied that the breach will not materially prejudice theinterests of the Holders); and• ascertain whether or not the assets of Fonterra that are or may be available, whether by way of security orotherwise, are sufficient or likely to be sufficient to discharge the amounts of the Bonds as they become due.The Trustee receives the benefit of a general indemnity from Fonterra for any expenses, losses or liabilities itreasonably sustains or incurs while acting as Trustee unless the claim arises out of a wilful default, grossnegligence or wilful breach of trust or where the Trustee has failed to show the degree of care and diligencerequired of it having regard to the powers, authorities and discretions conferred on it under the Trust Documents.The Trustee has absolute discretion as to the exercise of its powers in relation to the Bonds. Under the TrustDocuments, the Trustee may, amongst other things, in relation to the Bonds:• refrain from exercising any power until directed by an Extraordinary Resolution of Holders or the affectedclass of Holders;• decline to act or exercise any power, take any action or comply with any request or direction (including anydirection by an Extraordinary Resolution of Holders) unless it has first been indemnified to its satisfactionagainst all expenses, losses and liabilities it may reasonably sustain or incur by so doing;• represent and act on behalf of Holders in any matter concerning them generally;• in its discretion, invest any moneys held in its capacity as Trustee, in the name of the Trustee or its nominee,in any investment, with power to vary, deal with or dispose of such investment, and all income (less anycommissions properly payable to the Trustee) arising from all such investments will belong to the person inrespect of whom such moneys are held by the Trustee;• in the performance of its duties, act on, or decline to act on, any communication or document reasonablybelieved to be genuine and correct, any Holders’ resolution believed to have been properly passed at ameeting of Holders, certificates signed by or on behalf of Fonterra, and the advice or opinion of professionaladvisers; or• require Fonterra to report to Holders on certain matters, convene meetings of Holders or otherwise seekdirections from a court of New Zealand.ReportingFonterra covenants to supply to the Trustee annual and half-yearly consolidated financial statements for theFonterra Group and an annual report as to the financial condition of Fonterra and its Subsidiaries and as tocompliance with the Trust Documents.This includes a requirement that a Director and the chief executive officer or the chief financial officer of Fonterra,provide a report to the Trustee, following the end of each financial year and each financial half-year, as to variousmatters relating to Fonterra and the Bonds, including details of any matter that has arisen relating to Fonterrawhich would materially and adversely affect the ability of Fonterra to perform its obligations under the TrustDocuments and the Bonds or which adversely affects the interests of Holders, compliance by Fonterra with theprovisions of the Trust Documents and details of all Bonds that have been repaid on maturity in the immediatelypreceding financial year.Events of DefaultUpon the occurrence of any of the Events of Default set out in the Trust Documents, the Trustee may, andimmediately upon being directed to do so by an Extraordinary Resolution of Holders must, declare the Bonds tobe immediately due and payable. However, none of the events listed in the definition of Event of Default in theTrust Documents will constitute an Event of Default, and the Bonds will not become immediately due and payable,unless the Event of Default is continuing unremedied and the Trustee has given a notice to Fonterra declaring theBonds to be immediately due and payable.The Supplemental Trust Deed provides that if the Bonds are declared due and payable prior to their Maturity Datepursuant to clause 13.1 of the Master Trust Deed, interest will be payable at the Interest Rate from the mostrecent Interest Payment Date to and excluding the date of repayment.The Events of Default are listed in the Trust Documents. In summary, the Events of Default include the followingevents:• a failure to make any payment of interest on, or repayment of the Principal Amount in respect of, the Bondswithin 10 Business Days of the due date;

16• a failure to make any payment of any other amount payable under the Trust Documents within 20 BusinessDays of its due date;• any breach by Fonterra of any other material obligations under the Trust Documents that, if capable ofremedy, is not remedied within 20 Business Days of Fonterra becoming aware of that breach;• any breach of a representation or warranty in a material respect which has a material adverse effect onFonterra;• if Fonterra becomes insolvent, is placed into liquidation, a recommendation is made to appoint a statutorymanager in respect of Fonterra or any analogous procedure occurs in respect of it;• if any indebtedness in excess in aggregate of 1.00% of Total Assets at the relevant time of Fonterra is notpaid when due or within any applicable grace periods by Fonterra;• a distress, attachment or other execution for a sum exceeding 1.00% of Total Assets at the relevant time islevied or enforced upon, or commenced against, any asset of Fonterra and is not discharged or stayed within20 Business Days; and• any material provision of the Trust Documents ceases to have effect or becomes void, voidable, illegal,invalid or unenforceable.Investors should refer to the Trust Documents for a fuller description of the acts and omissions that constitute anEvent of Default.No enforcement by HoldersHolders have no direct enforcement rights and are not entitled to enforce any of their rights or remedies under theTrust Documents directly against Fonterra, unless the Trustee has failed to enforce such rights or remedies afterhaving become bound to do so under the provisions of the Trust Documents.Default interestIf any amount payable in respect of a Bond is not paid on its due date, interest will accrue on the unpaid amountat the rate determined by the Registrar to be the aggregate of 2% and the monthly Base Rate (as defined in theTrust Documents), compounded monthly until the unpaid amount is paid.Further IssuersFonterra can nominate any of its wholly-owned Subsidiaries to be the issuer of notes on the terms set out in therelevant supplemental trust deed entered into between the new issuer and the Trustee.Substituted ObligorThe Trustee may, without the consent of the Holders, agree to any wholly owned Subsidiary of Fonterra(“Substituted Obligor”) taking the place of Fonterra under the Trust Documents in substitution for Fonterra or aprevious Substituted Obligor. Such substitution may only occur if a number of requirements are met, as set out inthe Master Trust Deed. Those requirements include that:(a)(b)(c)(d)(e)(f)(g)the Substituted Obligor becomes bound by all the terms and conditions of the Trust Documents;such amendments are made to the other documents in respect of the Offer as the Trustee mayreasonably deem appropriate;two Authorised Officers of the Substituted Obligor certify that the Substituted Obligor will be solventimmediately after such substitution;any public rating assigned to the Bonds is maintained or increased;any other reasonable requirements the Trustee may reasonably consider are in the interests of theHolders, which may include that Fonterra guarantees payment of the Bonds and/or remains bound byall or certain provisions of the Trust Documents;the Substituted Obligor warrants and represents to the Holders that it has all the necessaryauthorisations and that the obligations assumed by it are valid, binding and enforceable; andlegal opinions are obtained confirming certain matters such as that the Trust Documents and Bondsconstitute legal, valid and binding obligations of the Substituted Obligor, the Substituted Obligor isvalidly incorporated, all necessary authorisations are in full force and effect and that the amountspayable to the Holders will not be reduced by taxes (other than taxes that Fonterra is not alreadyobliged to provide Holders a gross-up for under the terms of the Trust Documents).

17MeetingsThe Master Trust Deed contains provisions for meetings of Holders and the matters that may be determined byordinary or Extraordinary Resolutions.Fonterra must call a meeting of Holders at the request in writing of the Holders of at least 10% of the aggregatePrincipal Amount of the Bonds. The Trustee may convene a meeting of Holders at any time.An Extraordinary Resolution passed at a meeting of Holders is binding on all Holders, whether or not they werepresent at such meeting. However:• a resolution which affects a particular Holder only, rather than the rights of all Holders generally, or of aparticular class of Holders generally, will not be binding on that Holder unless that Holder agrees to be boundby the terms of such resolution;• a resolution which affects one class only of Bonds is deemed to have been duly passed if passed at aproperly convened and held meeting of the Holders of that class;• a resolution which affects more than one class of Bonds, but does not give rise to a conflict of interestbetween the Holders of any of the classes so affected, is deemed to have been duly passed if passed at asingle properly convened and held meeting of the Holders of all classes so affected; and• a resolution which affects more than one class of Bonds and gives rise to a conflict of interest between theHolders of any of the classes so affected is deemed to have been duly passed if passed at separate properlyconvened and held meetings of the Holders of each class so affected.After the occurrence of an Event of Default and while it continues unremedied, Holders may by an ExtraordinaryResolution direct the Trustee to declare the Principal Amount of notes, together with accrued interest thereon, tobe immediately due and payable by notice in writing to Fonterra.Holders have the power exercisable by Extraordinary Resolution to agree, approve, authorise, ratify and sanctionvarious acts, matters or things in relation to, or in connection with, the Trust Documents, the Bonds and theexercise or performance by the Trustee of its powers, duties and discretions. For example, the Holders may, byan Extraordinary Resolution:• sanction the release of Fonterra from payment of all or any part of the moneys payable pursuant to the TrustDocuments;• postpone or, with the agreement of Fonterra, accelerate the Maturity Date of the Bonds and suspend orpostpone for a time the payment of interest on the Bonds;• sanction any exchange of Bonds for other obligations or securities of Fonterra or any other company;• sanction any alteration, release, modification, waiver, variation or compromise or any other arrangementrelating to the rights of the Holders against Fonterra or its assets;• assent to any amendment to the terms of the Trust Documents;• sanction, assent to, release or waive any breach or default by Fonterra or the Trustee under any of theprovisions of the Trust Documents;• sanction any scheme for the reconstruction of Fonterra or for the amalgamation of Fonterra with any othercorporation where such sanction is necessary;• subject to section 62 of the Securities Act, discharge, release or exonerate the Trustee from all liability inrespect of any act or omission for which the Trustee has or may become responsible under the TrustDocuments;• subject to the provisions of the Trust Documents, remove the Trustee and approve the appointment of, orappoint, a new Trustee;• consent to, approve, authorise and direct the Trustee to do any of the above matters or any matter necessaryto carry out and give effect to any Extraordinary Resolution; and• authorise or direct Fonterra and, if required, the Trustee to execute any supplemental deed or otherdocument.An Extraordinary Resolution is a resolution passed at a meeting of Holders at which at least 75% of the Holdersvoting at the meeting, vote in favour of the resolution. A quorum for the purpose of passing an ExtraordinaryResolution is two or more Holders (present in person or by representative) holding or representing a majority inPrincipal Amount of the Bonds. If a quorum is not present and the meeting is adjourned, a quorum at theadjourned meeting is all Holders present (in person or by representative). Anything that may be done by Holdersby a resolution or an Extraordinary Resolution passed at a meeting of Holders may be done by a resolution inwriting signed by not less than 75% of Holders having the right to vote on that resolution and holding in aggregate

18the right to cast not less than 75% of the votes which could be cast on that resolution. Any Bonds for the timebeing held by Fonterra or any of its Subsidiaries will not whilst so held confer any right to vote.Amendment of Trust DocumentsThe terms and conditions of the Trust Documents may be altered with the approval of Holders by anExtraordinary Resolution at a meeting of Holders (whether convened by Fonterra or Holders) and, in limitedcircumstances, with the approval only of the Trustee and Fonterra. A description of the requirements for anExtraordinary Resolution is set out in the preceding paragraph of this Prospectus.The following amendments do not require Holder approval:• amendments of a minor, formal, administrative or technical nature;• amendments that are to correct a manifest error;• amendments that are to comply with the requirements or a modification of the requirements of any applicablelaw;• amendments that are necessary for the purpose of obtaining or maintaining a quotation of the Bonds on anystock exchange;• amendments that reflect an exemption granted to Fonterra, or an exemption that is applicable to Fonterra, inrelation to any obligation imposed upon Fonterra by or pursuant to the Securities Act, the Co-operativeCompanies Act 1996, the Companies Act or the Financial Reporting Act 1993 which is materially the same asor analogous to any obligation of Fonterra under the Trust Documents or the Bonds; and• amendments in respect of any of the provisions of the Trust Documents relating to the Trustee's fees,expenses and indemnities or the exercise of the Trustee's powers.The above circumstances are also subject to the general requirement that Fonterra and the Trustee must each beof the opinion that the amendment will not be materially prejudicial to the interests of Holders generally.In addition, the Trustee may temporarily vary the provisions of the Trust Documents, or waive any breach oranticipated breach by Fonterra, for such period and on such terms as:• may be deemed appropriate provided that the Trustee is satisfied that the interests of the affected Holdersgenerally will not be materially and adversely prejudiced; or• may be agreed by the Trustee to reflect an exemption of the nature referred to above as an amendment thatcan be made without Holder approval.Any amendment to the Trust Documents will be binding on all Holders and will only be effective if it is in writingand signed by Fonterra and the Trustee.MiscellaneousThe Trust Documents also contain detailed provisions relating to procedures for holding meetings of Holders,transfer and registration of Bonds and various other matters.Because the Bonds are to be registered (rather than bearer) notes, the Trustee and Fonterra are entitled to relyon the Register as the sole and conclusive record of the Bonds held by a Holder. Transfers must be effectedusing a registrable transfer form or by means of the FASTER system operated by NZX.Trustee’s statementThe statement required to be made by the Trustee pursuant to clause 13(3) of the Second Schedule of theSecurities Regulations is set out on page 9 of this Prospectus.14 OTHER TERMS OF OFFER AND SECURITIESAll the terms of the Bonds being offered by Fonterra are set out in this Prospectus (except for those implied bylaw) and in the Trust Documents.15 TO 32 FINANCIAL STATEMENTSThe financial statements required to be included in this Prospectus by the Second Schedule of the SecuritiesRegulations in respect of Fonterra (being the only member of the borrowing group for the purposes of theSecurities Regulations) are set out on pages 29 to 61 of this Prospectus.

19Interim financial statements for the six-month period from 1 August 2008 to 31 January 2009Fonterra expects to release the Fonterra Group consolidated interim financial statements for the six-month periodfrom 1 August 2008 to 31 January 2009 on or about 24 March 2009, which is shortly after the end of the Offerperiod.Due to the seasonal nature of many aspects of the Fonterra Group’s business, it is normal for the consolidatedinterim financial statements of the Fonterra Group to show significant variances from the position as disclosed inthe Fonterra Group audited consolidated financial statements for the immediately preceding financial period. (Inthe case of the upcoming interim financial statements, this refers to variances from the consolidated financialstatements for the 14-month period ended 31 July 2008).The Fonterra Group’s business generally follows the milk supply curve. Milk supply in New Zealand peaks inOctober and does not begin to fall significantly until February. In June and July, the milk supply in New Zealand isat its lowest point. Therefore inventory is expected to be at its highest point in January or February each year,and at its lowest point in July or August each year. Payments due to suppliers in January are higher than in Julyeach year as a result of the higher levels of milk supplied in the months leading up to January. Receivables arealso expected to be higher in January than in July each year.The current market has resulted in international dairy stocks building up as a consequence of higher globalproduction and a general reduction in demand following the previous significant increases in base commodityprices. Demand has been further reduced by the global financial crisis and economic slowdown. As a result,Fonterra Group’s inventory at 31 January 2009 is expected to be higher than the normal seasonal peak. Thisimbalance is expected to correct as pricing signals are passed through the chain from supplier to consumer.The Fonterra Group has significant net foreign exchange exposure against the US dollar. There has beensignificant devaluation in the NZ$/US$ exchange rate since 31 July 2008. The value of the unrealised hedginglosses on foreign exchange hedging contracts (used to mitigate foreign exchange exposure on forecast sales) at31 January 2009 is likely to be higher than at 31 July 2008. These are recognised on the balance sheet asderivative financial instruments (assets and liabilities) and the cash flow hedge reserve.Accordingly, it is likely that the consolidated interim financial statements of the Fonterra Group for the six-monthperiod to 31 January 2009, when released, will show variances of the nature described above, compared to theconsolidated financial statements at 31 July 2008.33 PLACES OF INSPECTION OF DOCUMENTSThe Constitution, the Trust Documents and the material contracts referred to under the heading MaterialContracts on page 12 may be accessed on the Companies Office website at www.companies.govt.nz, or may beinspected at 9 Princes Street, Auckland for free during normal business hours.34 OTHER MATERIAL MATTERSReturnsYour return on the Bonds will be a combination of:• the interest attaching to the Bonds which is payable on each Interest Payment Date; and• the price you receive if you choose to sell your Bonds.These returns may be affected in different ways by the Fonterra business and the risks the Fonterra businessfaces.RisksThe principal risks for you are that you do not recover the sum which you paid for the Bonds and/or you do notreceive the returns on your investment described above. This could happen for a number of reasons including:• the price at which the Bonds trade may be lower than the price you paid for them;• there may be no ready market for the Bonds;• Fonterra may become insolvent or be placed in receivership, voluntary administration, statutory managementor liquidation or cease to have sufficient assets to pay returns to Holders;• the operational and financial performance of Fonterra may be worse than expected;• Fonterra may not be able to redeem the Bonds on the Maturity Date;• the Bonds may be redeemed before the Maturity Date (as a result of the occurrence of an Event of Default);and

20• in the event of a change in company tax rates, individual income tax rates, or the way such rates affectHolder’s taxable income, such changes may impact on the returns to Holders.Some risk factors are specific to Fonterra’s business activities and some are of a more general nature. The risksset out in this section may individually, or in combination, affect the future operating performance of Fonterra andreturns on the Bonds described above.Given that Fonterra carries out its business largely through its Subsidiaries, risks that could affect the FonterraGroup could also affect Fonterra and so relevant risks relating to both Fonterra and the Fonterra Group areoutlined below.Consequences of insolvencyA Holder could receive none of, or less than, the returns described under the heading Returns if Fonterra becameinsolvent for any reason. However, provided a Holder has fully paid for the Bonds it holds, it will not be liable topay any money to any person as a direct consequence of holding Bonds if Fonterra becomes insolvent. As theBonds are unsecured, unsubordinated debt obligations, in a liquidation, receivership or statutory management ofFonterra, the Holder’s rights to payment of any moneys payable pursuant to the Bonds will rank after the claimsof:• persons to whom preferential payments must be made (including creditors of Fonterra preferred by law); and• secured creditors.Claims of the Holders will thereafter rank equally among themselves and with the claims of all other unsecured,unsubordinated creditors of Fonterra.Transfer riskIf a Holder sells their Bonds before they are redeemed, the price at which they are able to sell their Bonds may beless than the price paid for them. This is because changes in market interest rates and other factors can affectthe market value of the Bonds. For example, if market interest rates go up, the market value of the Bonds may godown and vice versa. The loss or gain is also, in part, a function of the effect of a change in underlying marketinterest rates on the value of your investment.The price at which Holders will be able to sell their Bonds may also be affected by a deterioration, whether real orperceived, in Fonterra’s creditworthiness, a lack of persons wishing to buy Bonds, or the lack of an establishedmarket or demand for the Bonds.Market, liquidity and yield considerationsIt is intended that the Bonds will be listed on the NZDX; however, while the Directors of Fonterra are of the viewthat a secondary trading market for the Bonds will develop over time there can be no assurance of the liquidity ofsuch a market. Consequently, Holders may not be able to sell their Bonds readily or at prices that will enablethem to realise a yield comparable to that of similar instruments, if any, with a developed secondary market.Depending on market conditions and other factors, Holders seeking to sell relatively small or relatively largeamounts of Bonds may not be able to do so at prices comparable to those that may be available to other Holders.The secondary market for the Bonds also will be affected by a number of other factors independent of thecreditworthiness of Fonterra. These factors may include the time remaining to the maturity of the Bonds, theoutstanding amounts of the Bonds, the amount of such Bonds being sold in the secondary market from time totime, any legal restrictions limiting demand for the Bonds, availability of comparable securities and the level,direction and volatility of market interest rates generally. Such factors will also affect the market value of theBonds.No investor should purchase Bonds unless the investor understands and is able to bear the risk that the Bondsmay not be readily saleable, that the value of the Bonds will fluctuate over time, and that such fluctuations may besignificant and could result in significant losses to the investor. This is particularly the case for Holders whosecircumstances may not permit them to hold the Bonds until maturity.Global business risksFonterra, through the Fonterra Group, sells over 90% of the milksolids it processes to markets outside NewZealand and must retain its global competitiveness.Changes in commodity prices may impact adversely on Fonterra’s future performance. Commodity prices can bevolatile, with substantial increases and decreases occurring over a relatively short period. Price volatility inFonterra Group’s principal products can result in substantial shifts in the levels of returns received and can impactFonterra’s balance sheet. (Please see section below entitled Current global environment.) Changes in particularmarkets’ demands for dairy commodities may over time create positive or negative arbitrage between thosemarkets’ domestic and international dairy commodity prices.

21International trade in dairy products is heavily influenced by foreign government actions including tariffs, quotas,other non-tariff barriers, subsidies and food-related regulation. The interaction of these factors is complex andcan result in substantial shifts in the competitiveness of Fonterra and the Fonterra Group and the levels of returnsfrom overseas markets. Fonterra, through the Fonterra Group, sells significant volumes of product acrossborders, which exposes Fonterra and the Fonterra Group to the risk of breaching foreign customs and import dutyregulations. This risk may potentially result in extended legal action, financial penalties, prosecution, temporarytrade embargoes and even permanent loss of market access. In addition, the relativity between the domesticmarket and international market prices may result in dumping allegations being made against Fonterra and theFonterra Group.A significant amount of the Fonterra Group’s revenue is earned from sales to non-OECD and developing marketsthat are economically and politically less stable than developed economies. A foreign country may becomepolitically unstable resulting in the loss of an investment, or default in payment by a significant debtor. Globalbusiness risks include war, nationalisation of assets, economic instability or downturn, deflation, currencyvolatility, price control, political interference and political uncertainty. Certain political, commercial or economicevents in one country may also disrupt delivery of Fonterra product to other intended markets.The international market for dairy products is also affected by general economic conditions in the major worldeconomies such as Europe, the United States of America, China and Japan. For example, a recession orrecovery in these economies would be expected to affect world commodity prices, including those for dairyproducts. As well, the international market for dairy products can be affected by consumption trends such as ifconsumers were to move their preferences to substitute dairy proteins and fats with vegetable solids.The retail market structure in New Zealand and overseas is changing. In particular, there is a growingconcentration of supermarket retail housebrands in New Zealand and Australia. This carries the risk of squeezingmargins and also the risk of losing market share if a supply contract is lost. Throughout the international marketthere are also continual changes in product markets, distribution channels, consumer preferences and tastes(including as a result of emerging health trends) – all of which could impact adversely on Fonterra’s futureperformance. In light of all these considerations, Fonterra ensures that the Fonterra Group continually reviews itsmarketing strategies and investment portfolio in overseas jurisdictions.Exchange rate riskFluctuations in the value of the New Zealand dollar relative to other currencies impact on the value in NewZealand dollars of:• sales of product to, and the relative value of costs incurred in, countries operating with those currencies;• investments in businesses, joint assets or assets owned within those countries; and• foreign currency liabilities.Fonterra uses a range of strategies in order to attempt to reduce the impact of foreign currency fluctuations andhas a financial risk management (“FRM”) policy applicable to the Fonterra Group that is regularly reviewed.Although the Fonterra Group’s main foreign currency exposure will generally be measured in US dollars, theeffect of the FRM policy takes account of all significant foreign currency exposures. Similarly, balance sheetexposures will be hedged according to the guidelines of the FRM policy.The Fonterra Group is vulnerable to foreign currency changes, although this is partially mitigated by a hedgingprogram, as well as other factors, including any variation in commodity prices, changes in product mix, operatingefficiencies, and changes in exposure due to higher or lower sales volumes.Regulatory riskThe majority of milk supplied to Fonterra is sourced from New Zealand. The formation of Fonterra was authorisedby the Dairy Industry Restructuring Act 2001 (“DIRA”), which established a regulatory framework for the NewZealand dairy industry (“Regulatory Framework”). The Regulatory Framework has two key possible effects onFonterra:• Fonterra faces competition in acquiring milk from farmers as the Regulatory Framework provides for newentry (both large and small scale) into the New Zealand dairy markets.• Fonterra could face additional costs in collecting milk from farmers and processing that milk as it is requiredto maintain open entry.The extent of, and reasons for, these possible effects are set out below.Supply of raw milk to independent processors in New ZealandFonterra is required by regulations to supply raw milk to independent processors who seek it, includingcompetitors, currently up to an aggregated maximum of 600 million litres per year (around 4% of Fonterra’s totalannual milk supply). This current aggregate may, by Order in Council under the DIRA, be increased up to a

22maximum of 5%, of raw milk supplied to Fonterra. Unless Fonterra and the purchaser of the raw milk agreeotherwise, the price of the milk must be calculated according to the formula set out in the Dairy IndustryRestructuring (Raw Milk) Regulations 2001. Of the 600 million litres to be supplied in the 2008/2009 season,Fonterra must supply Goodman Fielder New Zealand Limited (a domestic based consumer dairy companycompeting with Fonterra’s New Zealand consumer businesses) with up to 250 million litres and any otherindependent processor up to 50 million litres. This requirement makes new entry into the New Zealand dairymarkets easier as other processors can commence or continue business without establishing their own network ofmilk suppliers. The supply of raw milk to Goodman Fielder New Zealand Limited, and other processors andrelated pricing arrangements, have the effect of facilitating competition in New Zealand between that companyand Fonterra’s largest New Zealand operating consumer company, Fonterra Brands (New Zealand) Limited.The New Zealand Government reviewed the regulations in 2007/08 and found that the formula for setting thedefault price results in independent processors accessing Fonterra milk under the regulations at a lower pricethan Fonterra pays its own suppliers and that there was no mechanism to manage excess demand for raw milkabove the 600 million litre limit.The Government has announced that new regulations will be introduced that limit the volume of raw milk to 600million litres (approximately 4% of Fonterra’s supply) for the next season (2009/10) and beyond. In addition,legislation will be drafted to introduce an auction for the available raw milk from the start of the 2010/11 dairyseason. The Government has indicated that it believes an auction is a fair way of setting the price for the raw milksupplied under the regulations. The full design details of the proposed auction and the impact on the quantities ofmilk supplied to Goodman Fielder New Zealand Limited and other processors are yet to be finalised andannounced.Suppliers able to supply competitorsFonterra is required to allow its supplying shareholders to supply up to 20% of their milk to a third party if theshareholders meet certain conditions, without Fonterra being able to discriminate against them in any way,provided the milk does not have a unique patentable feature. Again, this makes it easier for other processors togain access to milk supply as they will be able to take milk from suppliers without having to ask those suppliers tocease supplying Fonterra entirely.Open entryFonterra must accept all new suppliers who make an application during the application period, and whosetransportation costs are no more than any existing Fonterra supplier in the region, subject to minimum deliveryand quantity requirements and certain capacity constraints on Fonterra. Therefore, Fonterra does not have thediscretion to refuse to accept suppliers, except in the limited circumstances referred to above, and may also berequired to provide additional capacity to accept additional supply.Open exitA supplying shareholder who wants to leave Fonterra may do so by giving notice by the end of February in anyyear for exit on 31 May of that year, except where the supplier has a longer-term contract (there are limits on thenumber of long-term supply contracts Fonterra can enter into, see Limits on long-term supply contracts below).When the supplier leaves, they will receive cash, capital notes or redeemable preference shares that are equal tothe value of the shares they surrender. Open exit makes it easier for a new or existing processor to encouragesuppliers to leave Fonterra as that processor need only agree to pay the supplier a milk price that is competitivewith Fonterra’s price. Open exit also makes it easy for suppliers to leave dairying and use their land for otherpurposes. Suppliers will be paid out the current value of their capital investment in Fonterra if they leaveFonterra. Accordingly, Fonterra faces the dual risk of loss of revenue (milk supply diverted to a competitor or milksupply terminating due to cessation of dairying) and loss of capital (departing and reducing suppliers requesting areturn of their capital). In addition, Fonterra’s milk processing assets could become underutilised, which mayaffect overall financial performance.Milk and share pricesFonterra must offer to each new supplier the same terms and conditions of milk supply as it offers to a currentsupplier in the same circumstances (or terms which are different only to reflect different circumstances). Similarly,the terms of shares issued to new suppliers must be the same for new suppliers as for current suppliers. As aresult, although Fonterra is permitted to respond to competition it cannot do so in a manner which breaches theserequirements.Limits on long-term supply contractsFonterra must offer suppliers, as a minimum, a one year supply contract. It may offer longer-term contracts but itmust ensure that at least a third of all the milk produced in a 160 kilometre radius of any point in New Zealand iseither supplied to someone other than Fonterra or under a contract to Fonterra that expires at the end of theseason, or which can be terminated at the supplier’s option without penalty.This means that, at any time, some milk supply will always be available for other processors to acquire, providedthat they agree to pay the supplier a price that makes that supplier willing to leave Fonterra.

23Removal of export monopolyThe DIRA removed the NZDB exclusive rights to export dairy products on 16 October 2001. As a result, otherdairy processors that wish to establish themselves in New Zealand are able to freely export dairy products andnew dairy exporters have emerged since the implementation of the DIRA.Under the DIRA the NZDB, a wholly-owned Subsidiary of Fonterra, was granted exclusive export rights during an“initial period” for specified products to a small number of designated dairy markets that are subject to foreigngovernment controls. The value of the export rights to the designated markets can vary significantly as a result ofchanges to supply and demand in the relevant markets and also as a result of changes to global commodityprices for the relevant products. The rights in relation to certain markets can have no value while rights to othermarkets can have significant value. The value of export rights to each market can also fluctuate significantly overtime.The initial period is different for each of the designated dairy markets under the DIRA, with the initial periodexpiring in all designated markets by 31 December 2010.Upon expiry of the initial period, the relevant export rights are vested in the New Zealand Government. In 2007the New Zealand Government amended the DIRA removing New Zealand restrictions on the export of products totwo of the designated markets. The amendments also provide a new system for allocating the rights to export tothe remaining designated markets based on the proportion of milksolids collected by a New Zealand dairyprocessor. Currently, under this system Fonterra can expect to obtain more than 90% of the export rightsavailable, with that percentage varying in the future according to the proportion of total milksolids collected byFonterra in New Zealand. The expiry of these rights will impact on Fonterra’s returns however the impact will varyfrom time to time according to supply and demand in relevant markets and changes to global commodity pricesfor the relevant products.Food safety and environmental riskIn the overseas markets in which the Fonterra Group operates, New Zealand is perceived as a source of safe,high quality dairy products. The Fonterra Group sources around 30% of the product it sells from countries outsideNew Zealand. Some of the countries and areas where the Fonterra Group, and joint ventures in which it isinvolved, source dairy products include Australia, USA, Europe, South American countries, Middle Easterncountries and Sri Lanka and other Asian countries. There can be significant quality or food safety issuesassociated with dairy product being sourced from other countries and these issues could have a significant affecton the returns from the relevant Fonterra business or joint venture business, as well as the overall reputation ofFonterra and the Fonterra Group. Anything adversely impacting on the perception of New Zealand dairy productsor on the reputation of Fonterra and the Fonterra Group internationally could impact on the ability to make futuresales of product at favourable prices and therefore have a significant impact on Fonterra’s performance and theoverall value of Fonterra or of the relevant business unit affected.As with any food business, there is an inherent risk that Fonterra products might be contaminated in theproduction process or from raw milk supply adulteration, or might otherwise be affected by food safety issues oradverse publicity. The storage, use, production and transport of hazardous substances by (and on behalf of) theFonterra Group involves risks relating to accidents or spills, contamination and harm to the environment orpeople. Contamination and food safety issues, accidents with and/or spills of hazardous substances harming theenvironment or people, or adverse publicity (even if from false, malicious or reckless allegations), may potentiallyinvolve significant cost and reputational harm. Reputational harm could also affect the ability of Fonterra and theFonterra Group to maintain the value of its brands. The Fonterra Group operates under quality controlprocedures which it considers to be effective. These manage but do not remove the risk of contractor or supplierconduct having adverse consequences for the Fonterra Group due to food or environmental contamination.Food businesses generally, including dairy, also face increased scrutiny as a result of global concerns aboutobesity and other health issues such as heart disease and diabetes, and increased regulator scrutiny of productlabel health claims. In addition, there are risks associated with wider environmental concerns, geneticmodification issues, animal welfare concerns and concerns over the potential environmental impacts of shippingproducts over long distances (“food miles”) linked with dairying in New Zealand, which may impact on themarketing of dairy products in New Zealand or internationally.Contract pricing riskThe Fonterra Group enters into forward contracts for the sale of a proportion of its production of commodity dairyproducts each year. The proportion of products sold in this fashion, and the terms of such contracts, change fromyear to year. Any advantage or disadvantage of sales of commodity products under forward contracts, relative tosales of products made at spot market prices at any particular time, will change as a result of the variation inmarket prices for commodity dairy products.Reputational riskThe occurrence of any of these risk factors has the potential to impact on the reputation of Fonterra and theFonterra Group and as a result the value of the Fonterra Group’s brands could be adversely affected.

24Brands ownershipNumerous brands are owned and used by Fonterra and its Subsidiaries, and in some cases third party licensees,across a number of countries. Brands carry a significant value on the Fonterra Group’s balance sheet. An eventadversely affecting the value of a brand in one jurisdiction could have a negative effect in another jurisdiction witha resultant adverse effect on Fonterra’s financial performance both in terms of loss of profits and potentially awritedown of the balance sheet value of the brand.Risks associated with being an agricultural businessThe Fonterra Group is an agricultural based business and could therefore be adversely affected by factors suchas changes in climate (for example, drought) or by serious outbreaks of disease in cows (such as foot and mouthdisease). These factors could disrupt business and cause reputational harm, in terms of perceived safety andquality of product, and reliability of supply. Reputational harm would impact on the Fonterra Group’s ability tomake future sales of products at favourable prices and therefore on returns. These risks are mitigated somewhatby the geographical diversification of the Fonterra Group’s milk production and New Zealand’s border controlsand bio-hazard risk management strategies. However, given that the majority of the Fonterra Group’s raw milk isproduced in New Zealand, if factors such as these occurred in New Zealand they may have an adverse effect onFonterra’s financial performance.Fonterra also faces the risk of loss of supply arising from competition for land use in New Zealand and tocompeting milk processors. Supplying dairy farmers could choose to use their land for activities other thandairying, such as other agricultural uses, or for urban development. This gives rise to the risks of loss of revenue,loss of capital and underutilisation of milk processing assets as discussed under the heading Open exit above.Expansion riskThe pursuit of expansion by the Fonterra Group involves exposure to financial and operational risks, whether theyinvolve the acquisition of businesses or interests in businesses (including through joint ventures and theacquisition of minority or majority shareholdings), or the introduction of new product lines. The financialperformance of acquisitions and joint ventures impacts on Fonterra’s financial performance. Fonterra seeks tomanage the risk from expansion by thoroughly analysing prospective opportunities and adopting risk reductionprogrammes when implementing them. Individual propositions are only progressed if they can reasonably beexpected to result in enhanced performance and profitability for the Fonterra Group.The Fonterra Group has a number of joint venture interests including significant investments in joint ventures inEurope (the Arla Fonterra Foods Joint Venture and the DMV Fonterra Excipients Joint Venture with Campina),South America (the Dairy Partners Americas Joint Venture with Nestlé), and North America (the DairiConceptsJoint Venture with Dairy Farmers of America) as well as significant investments in a number of companies aroundthe world.Operating businesses through joint ventures means that the Fonterra Group does not have full control over thesebusinesses, which exposes Fonterra to greater risk. This risk is managed through the agreements which areentered into in order to form the relevant joint venture.International trade environmentWhile the World Trade Organisation (“WTO”) provides a framework of rules for international agricultural trade,there remains significant risk of countries restricting imports of dairy products or affecting global dairy returns,whether through changes in tariffs and quotas, or through their domestic regulatory regimes. A particularexample of the former is the recent pressure to restrict imports of milk protein isolates (specialised proteinproducts) into Canada. An example of the latter is the intervention price cuts introduced as part of the EUCommon Agricultural Policy reforms since 2003, which have reduced the Fonterra Group’s returns from thatmarket, or the commercial impacts of regulations for the administration of imports into the EU of New Zealandquota butter and cheese. In addition, in January 2009, the European Union announced that export subsidieswould be reintroduced for a number of dairy commodities. It is expected that this will have an impact on globaldairy prices which may reduce the Fonterra Group’s returns.Liberalisation of the international trade environment, for example through the Doha Development Round of WTOnegotiations or through bilateral or plurilateral Free Trade Agreements, present mostly positive opportunities forthe Fonterra Group. But they also carry risks that would damage the Fonterra Group’s business in some areas –for example, exclusion or disadvantaging of New Zealand product compared with rival companies or countries asa result of new agreements, interpretation or changes to international trade rules, for example rules aroundGeographical Indicators or changes to labelling or composition requirements.It is possible that New Zealand’s obligations under the Kyoto Protocol could add costs to the Fonterra Group’sactivities depending on policies and programs adopted by the New Zealand Government. Fonterra could beimpacted by Government regulation or taxes on emissions, the amount and timing of which is uncertain.

25Production risksA major catastrophe, accident or local disaster of significant magnitude (for example, an earthquake or fire thatdestroys a manufacturing facility or general business infrastructure) could materially adversely affect Fonterra’sfinancial performance and position. To an extent, some of these risks are mitigated by insurance cover andbusiness continuity planning.Production delays (including as a consequence of industrial action, product tampering, technology failure ordisruption in energy supplies) and other supply chain difficulties of getting product to market (including industrialor other action affecting shipping or a significant failure in automated systems or computer technology) would alsoimpact adversely on Fonterra’s financial performance.The risk of serious injury or death (in particular in manufacturing and logistics operations, and notwithstandinghealth and safety procedures) could have an adverse financial impact as it has potential to impact on employerreputation, compliance costs, staff morale and productivity, and may attract media exposure and additionalregulatory scrutiny.Production may also be disrupted in the event of material non-compliance with environmental or other approvalsauthorising the production and associated processes.Management risksFonterra is subject to numerous risks inherent in the management of the day to day business activities of theFonterra Group. Such risks are inherent in the people, processes, systems and structures employed in theconduct of its business. For example, both domestically and overseas, the Fonterra Group may be unable toattract or retain the right staff in the right place at the right time.Inherent risks also arise in connection with the changes associated with the implementation of the wide-reachingtechnological, process and cultural initiatives that the Fonterra Group is pursuing.Bio-technology researchThe Fonterra Group is undertaking long-term biotechnology research, with the future option of commercialisingdevelopments in a responsible way according to the needs and wishes of its customers and key stakeholders.The Fonterra Group’s current research activities in New Zealand have been approved by the relevant regulatoryauthorities, are laboratory based, and are at an early stage of knowledge discovery. Currently, there is noprospect of applications for field trials by the Fonterra Group of any genetically modified organism in New Zealandin the near future. None would be sought unless it was regarded as being in the interests of our stakeholders,including customers. The Fonterra Group's current policy is not to source milk products from genetically modifiedcows.Litigation riskThe Fonterra Group has a number of claims and legal actions arising from the normal course of its businessactivities, which it is currently defending. However, the Directors, having reviewed legal and accounting adviceand having made their own enquiries of management, expect that either the outcome will not be adverse forFonterra, or that any adverse outcome will not have a material adverse effect on Fonterra’s financial position.Recent issues in ChinaIn August 2008, Fonterra became aware that certain milk products manufactured in China had beencontaminated. This included products sold by Shijiazhuang San Lu Group (“San Lu”), a company in which aFonterra Subsidiary has a 43% interest. This contamination has been widely reported in the global media andinvolves a significant number of Chinese milk producing companies, including some of the largest milk producingcompanies in China. Indications are that a contaminant was illegally introduced into the milk supply chains ofthese milk producing companies, including those of San Lu. Extensive product recalls have been instigated inrelation to the contaminated products. A small amount of milk product manufactured by San Lu and imported intoTaiwan by a Subsidiary of Fonterra was also affected, and recalled.As a result of these issues associated with the contamination, the Fonterra Group’s accounts for the 14-monthperiod ended 31 July 2008 recognise an impairment charge of $139 million against the carrying value of theinvestment in San Lu, reflecting the cost of product recall and the anticipated loss of value in the brands andgoodwill of San Lu. Following this impairment charge, which was not material to the Fonterra Group’s overallfinancial position, Fonterra’s best estimate of the book value of the investment in San Lu at the time was $62million. In December 2008, a court in Shijiazhuang, China issued a bankruptcy order against San Lu. Fonterranow considers the value of the investment in San Lu to be zero. As the investment in San Lu is held by aSubsidiary of Fonterra and not Fonterra itself, the impairment charge is only reflected in the Fonterra Group’sconsolidated financial statements.At the date of this Prospectus, there is nothing to suggest that these issues will have any further impact onFonterra’s financial position and balance sheet that is material.

26General risksOther special factors and risks that could materially affect the trading prospects, financial performance or positionof Fonterra and the Fonterra Group include:• a downturn in general economic and business conditions (domestic and global);• New Zealand’s international image being significantly tarnished with Fonterra and the Fonterra Group beingadversely affected by association, resulting in loss of international customers and/or markets;• increased pressure on energy resources in New Zealand;• increased competition (domestic and global), including the risk that competitors actively pursue and capture amaterial segment of the Fonterra Group’s customer base or supplier base;• decreases in customer demand;• changes in timing and amount of forecast capital expenditure;• changes to industry relevant regulation;• changes to business alliances;• changes to prices paid for milk to suppliers;• changes in tax rates or tax regimes, particularly outside New Zealand;• changes to New Zealand and international prices for dairy products; and• climatic conditions.Many of these factors are beyond the control of Fonterra and the Fonterra Group.Current global environmentAdverse effects being experienced in the global economy arising out of events in the credit markets and financialservices industry have impacted the global trading environment and also resulted in a global liquidity crisis.The current market has resulted in international dairy stocks building up as a consequence of higher globalproduction and a general reduction in demand following the previous significant increases in base commodityprices. Demand has been further reduced by the global financial crisis and economic slowdown.As with other businesses, a continuation of the credit and liquidity crisis could impact the purchasing patterns ofsome of the Fonterra Group’s customers.Fonterra uses debt to partially fund the operations of the Fonterra Group. The debt is provided by a combinationof bank loans and debt issued in the global capital markets. On an on-going basis, Fonterra is required torefinance credit lines and debt coming to maturity. This refinancing of debt is effectively managed by spreadingthe maturities of existing debt to ensure that refinancing requirements are limited at any point in time, maintainingsufficient undrawn, committed funding facilities and supported by building strong relationships with banks andother lenders.The scope and extent of the current global liquidity crisis cannot be predicted and, as a result, it is not possible toassess with any certainty any additional impact that the crisis may have on the funding, operations and activitiesof the Fonterra Group. While largely unpredictable, a sustained continuation and/or escalation of the currentglobal liquidity crisis could adversely impact the business and operations of Fonterra and the Fonterra Group.NZX Waiver and Securities Commission ExemptionNZX has granted a waiver from NZDX Listing Rule 11.1.1, to enable Fonterra to decline to accept or register atransfer of Bonds if such transfer would result in the transferor holding or continuing to hold Bonds with a PrincipalAmount of less than $5,000 or if such transfer is for an amount of less than $1,000 or multiple thereof.The effect of the waiver from NZDX Listing Rule 11.1.1 is that the minimum holding amount in respect of theBonds will at all times be $5,000 in aggregate and that Bonds can only be transferred in multiples of $1,000.The Securities Commission has granted Fonterra an exemption from clause 24(b)(i) of the Second Schedule ofthe Securities Regulations, which exempts Fonterra from the requirement to state investment in subsidiaries atcost (less amounts written off) or market value (if ascertainable), whichever is the lesser in the financialstatements included in this Prospectus.The effect of the Securities Act (Fonterra Co-operative Group Limited) Exemption Notice 2009 is that the financialstatements and summary financial statements of Fonterra and the summary financial statements of the FonterraGroup included in this Prospectus state investment in subsidiaries at deemed cost less amounts written off. This

28FONTERRA SUMMARY FINANCIAL INFORMATIONThis summary of financial information for Fonterra Co-operative Group Limited (“Fonterra”, the “Issuer”) has beenprovided in accordance with the Second Schedule of the Securities Regulations 1983.NZ IFRS/NZ GAAPNZ IFRS/NZ GAAPPreviousNZ GAAPPreviousNZ GAAPPreviousNZ GAAPPreviousNZ GAAP31/7/2008 31/5/2007 31/5/2007 31/5/2006 31/5/2005 31/5/200414 months 12 months 12 months 12 months 12 months 12 months$ million $ million $ million $ million $ million $ millionRevenue 9,198 4,870 5,247 5,027 5,342 5,158Cost of goods sold (9,198) (4,870) (4,870) (4,694) (4,820) (4,556)Cost of goods sold – Value Return - - (728) (300) (522) (576)Gross profit/ (loss) - - (351) 33 - 26Net operating expenses (438) (309) (275) (295) (301) (309)Revaluation of subsidiaries - - 663 514 528 301Total net operating expenses (438) (309) 388 219 227 (8)Finance income 497 372Finance expense (401) (340) (381) (321) (247) (223)Profit/(loss) before tax (342) (277) (344) (69) (20) (205)Tax credit 84 71 313 164 175 154Profit/(loss) after tax (258) (206) (31) 95 155 (51)Intangible assets - software 30 43 - - - -Total tangible assets 16,193 15,414 15,678 14,243 14,685 11,008Total assets 16,223 15,457 15,678 14,243 14,685 11,008Total liabilities (12,875) (11,192) (10,798) (9,226) (9,957) (6,395)Equity (3,348) (4,265) (4,880) (5,017) (4,728) (4,613)No information has been provided in respect of dividends and dividends per share information as Fonterra does not pay ‘dividends’.The summary financial information presented above has been extracted or derived from audited financial statements.On 1 June 2007 Fonterra adopted New Zealand equivalents to International Financial Reporting Standards (“NZ GAAP”or “NZ IFRS”). The financial information for the years ended 31 May 2004 to 31 May 2006 has been prepared underprevious New Zealand Financial Reporting Standards (“Previous NZ GAAP”). The financial information for the yearended 31 May 2007 and the 14 month period ended 31 July 2008 has been prepared under NZ IFRS. The financialinformation for the year ended 31 May 2007 has also been reported under Previous NZ GAAP. Note 22 of the financialstatements on pages 29 to 61 explains the main differences between the Previous NZ GAAP and NZ IFRS.During the periods to which the information above relate, there have been no extraordinary items or material changes inthe activities of Fonterra. Except for the transition from Previous NZ GAAP to NZ IFRS, there have been no materialchanges in accounting policies. The following items, by their incidence or size, impacted the performance of Fonterra:2008 • Fonterra changed its balance date from 31 May to 31 July. The results for 31 July are for a 14 month period,while prior periods are for a 12 month period and are therefore not directly comparable.• Higher revenues were achieved as a result of the significant increase in commodity prices. The increase incommodity prices resulted in a significantly higher Milk Price, and therefore cost of goods sold. The higherMilk Price also increased receivables and borrowings.• Key classification differences from Previous NZ GAAP to NZ IFRS in this summary of financial informationare:• Previous NZ GAAP classified finance income in revenue. It is now disclosed separately.• Previous NZ GAAP classified Value Return in cost of goods sold. Value Return is now recogniseddirectly in equity. Refer to accounting policy q, payout to suppliers, in Fonterra’s financial statementson pages 29 to 61 for an explanation of Value Return.• Previous NZ GAAP classified the tax credit arising on Value Return paid to shareholders in the taxcredit. This is now recognised, with the Value Return, directly in equity.• Previous NZ GAAP classified software (within property, plant and equipment) as part of total tangibleassets. It is now classified as an intangible asset.• Previous NZ GAAP permitted the revaluation of investments in subsidiaries to net tangible asset backing.They are now held at cost.2007 • The key differences between Previous NZ GAAP and NZ IFRS discussed for 2008 are also relevant for2007.2005 • The increase in total assets and total liabilities relates to increased funding to and from subsidiaries.

29FONTERRA FINANCIAL STATEMENTSFonterra Co-operative Group LimitedThese financial statements for Fonterra have been provided in accordance with the Second Schedule of the SecuritiesRegulations 1983.The Directors hereby approve the financial statements for the 14 months ended 31 July 2008. For and on behalf of theBoard of Directors:PageNoThe financial statements comprise:Income statement 30Statement of total recognised income and expense 30Balance sheet 31Cash flow statement 32Statement of significant accounting policies 33Notes to the financial statements 39

30Fonterra Co-operative Group LimitedIncome statementFor the 14 months ended 31 July 2008Notes14 months to31 July 2008$ million12 months to31 May 2007Revenue from sale of goods 9,198 4,870Cost of goods sold 1 (9,198) (4,870)Gross profit - -Other operating income 31 5Selling and marketing expenses (4) (2)Administrative expenses (372) (236)Other operating expenses (93) (76)Operating (loss) before finance costs and tax 2 (438) (309)Finance income 3 497 372Finance costs 3 (401) (340)Net finance income 96 32(Loss) before tax (342) (277)Tax credit 4 84 71(Loss) for the period (before Value Return) attributable toshareholder suppliers(258) (206)Statement of total recognised income and expenseStatement of total recognised income and expenseFor the 14 months ended 31 July 2008Notes$ million14 months to31 July 200812 months to31 May 2007Income and expense recognised directly in equity - -(Loss) for the period (before Value Return) attributable toshareholder suppliersTotal recognised income and expense for the periodattributable to shareholder suppliersThe accompanying notes form part of these financial statements.5 (258) (206)(258) (206)

31Fonterra Co-operative Group LimitedBalance sheetAs at 31 July 2008NotesAs at31 July 2008$ millionAs at31 May 2007ASSETSCurrent assetsCash and cash equivalents 469 5Trade and other receivables 6 8,093 7,166Taxation receivable 201 304Derivative financial instruments 15 179 698Total current assets 8,942 8,173Non-current assetsProperty, plant and equipment 7 74 33Investment in subsidiaries 6,860 6,860Intangible assets 8 30 43Deferred tax asset 12 149 145Derivative financial instruments 15 103 127Other non-current assets 65 76Total non-current assets 7,281 7,284Total assets 16,223 15,457LIABILITIESCurrent liabilitiesBank overdraft - 40Borrowings 11 1,840 832Trade and other payables 9 6,429 5,512Owing to suppliers 1,069 974Derivative financial instruments 15 347 308Provisions 10 66 51Other current liabilities 1 2Total current liabilities 9,752 7,719Non-current liabilitiesBorrowings 11 2,886 3,108Capital notes 13 35 35Derivative financial instruments 15 155 296Provisions 10 47 32Other non-current liabilities - 2Total non-current liabilities 3,123 3,473Total liabilities 12,875 11,192EQUITYCo-operative shares 5 4,297 4,897Accumulated losses 5 (949) (632)Total equity attributable to shareholder suppliers 3,348 4,265Total liabilities and equity 16,223 15,457The accompanying notes form part of these financial statements.

32Fonterra Co-operative Group LimitedCash flow statementFor the 14 months ended 31 July 2008Notes14 months to31 July 2008$ million12 months to31 May 2007Cash flows from operating activitiesCash was provided from:- Receipts from customers 9,226 4,900- Taxation received - 20Cash was applied to:- Payments to creditors and employees (393) (266)- Payments for milk supplied (8,855) (4,877)Net cash flows from operating activities 14 (22) (223)Cash flows from investing activitiesCash was provided from:- Proceeds from disposal of property, plant and equipment 1 -- Proceeds from hedging of net investments - 84- Net loans from subsidiaries 994 1,831Cash was applied to:- Acquisition of property, plant and equipment (18) (5)- Acquisition of intangibles (14) (20)- Acquisition of other non-current assets (4) (6)Net cash flows from investing activities 959 1,884Cash flows from financing activitiesCash was provided from:- Net proceeds from borrowings 5,354 3,456- Proceeds from issue of co-operative shares 1,098 1,276- Proceeds for co-operative shares not yet issued 44 -- Repayment of deferred share receivable - 1- Interest received 59 15Cash was applied to:- Interest paid (359) (336)- Net repayments of borrowings (4,568) (3,715)- Repurchase of capital notes - (577)- Surrender of co-operative shares (1,425) (237)- Surrender of peak notes - (1,111)- Value Return payment to shareholder suppliers (636) (466)Net cash flows from financing activities (433) (1,694)Net increase/(decrease) in cash and cash equivalents 504 (33)Cash and cash equivalents at the beginning of the period (35) (2)Cash and cash equivalents at end of period 469 (35)Reconciliation of closing cash balances to the balance sheet:Cash and cash equivalents 469 5Bank overdraft - (40)Closing cash balances 469 (35)The accompanying notes form part of these financial statements.

Fonterra Co-operative Group LimitedStatement of significant accounting policiesFor the 14 months ended 31 July 200833a) General informationFonterra Co-operative Group Limited (“Fonterra”, “Parent”, or the “Company”) is a co-operative companyincorporated and domiciled in New Zealand. Fonterra is registered under the Companies Act 1993 and the CooperativeCompanies Act 1996, and is an issuer for the purpose of the Financial Reporting Act 1993. Thesefinancial statements have been prepared for Fonterra as a separate legal entity for inclusion in a prospectus.On 24 January 2008 Fonterra changed its balance date to 31 July, there is no change in the season end date andno change in the dates for issuing or redeeming of shares. The later 31 July balance date better reflectsFonterra's financial performance from the sales of milk supplied in the season. Financial statements for Fonterrahave been prepared for the 14 months ended 31 July 2008. The comparative period is for the 12 months ended31 May 2007 and therefore the comparative amounts shown in the income statement, statement of totalrecognised income and expense, the cash flow statement and related notes may not be directly comparable.The Company is primarily involved in the collection and sale of milk to a subsidiary in New Zealand and is a profitoriented entity.The Company and its subsidiaries form the Fonterra group (the “Fonterra Group”). Consolidated financialstatements for the Fonterra Group may be obtained from www.fonterra.com .b) Basis o f preparationOn 1 June 2007 Fonterra adopted New Zealand Equivalents to International Financial Reporting Standards (“NZIFRS”). These financial statements have been prepared in accordance with New Zealand Generally AcceptedAccounting Practice (“NZ GAAP”), and the Second Schedule of the Securities Regulations 1983 (including theexemption granted from clause 24(b)(i) ). They comply with NZ IFRS, and other applicable Financial ReportingStandards, as appropriate for profit-oriented entities. These financial statements also comply with InternationalFinancial Reporting Standards (“IFRS”).NZ IFRS 1: First-time adoption of NZ IFRS, requires an entity to use the same accounting policies in its openingNZ IFRS balance sheet and throughout all the periods presented in its first NZ IFRS financial statements. TheCompany has adjusted amounts reported previously in financial statements prepared in accordance with its oldbasis of accounting ("Previous NZ GAAP"), except where exemptions from full retrospective application of NZIFRS, allowable under NZ IFRS 1, have been applied. Note 22 explains the transition from Previous NZ GAAP toNZ IFRS.These financial statements are prepared on a historical cost basis except for derivative financial instruments andthe hedged risks on certain debt instruments, which are recognised at their fair values.These financial statements are presented in New Zealand dollars (“$”), which is the Company’s functional andpresentation currency, and rounded to the nearest million.The preparation of financial statements requires management to make judgements, estimates and assumptionsthat affect the application of accounting policies and the reported amounts of assets, liabilities, income andexpenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewedon an ongoing basis. Revisions of accounting estimates are recognised in the period in which the estimates arerevised and in any future periods affected.In particular, information about significant areas of estimation uncertainty and critical judgements in applyingaccounting policies that have the most significant effect on the amount recognised in the financial statements aredescribed in the following notes:• Note 1 and Policy (q) Calculation of Milk Price.• Note 10 Provisions.• Note 15 Financial instruments - Fair value of certain financial instruments.c) Investment in subsidiariesSubsidiaries are entities controlled by the Company. Control exists when the Company has the power to governthe financial and operating policies of an entity so as to obtain benefits from its activities.The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued andliabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.

Fonterra Co-operative Group LimitedStatement of significant accounting policiesFor the 14 months ended 31 July 200834d) Foreign currencyForeign currency transactions are translated into the functional currency of the Company using the exchange rateat the dates of transactions. Foreign exchange gains and losses resulting from the settlement of suchtransactions and from the translation, using the exchange rates at the reporting date, of monetary assets andliabilities denominated in foreign currencies are recognised in the income statement.e) Financial assets and liabilitiesA financial asset or liability is recognised if the Company becomes a party to the contractual provisions of theasset or liability. A financial asset or liability is recognised initially (at trade date) at its fair value plus, in the caseof a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributableto the acquisition or issue of the instrument. Financial assets and liabilities carried at fair value through profit orloss are initially recognised at fair value and transaction costs are expensed in the income statement.After initial recognition, financial assets are measured at their fair values except for loans and receivables andheld-to-maturity investments, which are measured at amortised cost using the effective interest method. Afterinitial recognition, financial liabilities are measured at amortised cost using the effective interest method except forfinancial liabilities at fair value through profit or loss.Investments in subsidiaries are stated at cost, less any impairment.Financial assets are derecognised if the Company’s contractual rights to the cash flows from the financial assetsexpire or if the Company transfers the financial asset to another party without retaining control or substantially allrisks and rewards of the asset. Financial liabilities are derecognised if the Company’s obligations specified in thecontract expire or are discharged or cancelled.Financial assets are classified on initial recognition into the following categories: at fair value through profit orloss, held-to-maturity investments, loans and receivables, and available-for-sale. Financial liabilities are classifiedas either fair value through profit or loss, or financial liabilities measured at amortised cost. The classificationdepends on the purpose for which the financial assets and liabilities were acquired. Management determines theclassification of its financial assets and liabilities at initial recognition.(i) Financial assets and financial liabilities at fair value through profit or lossFinancial assets and liabilities in this category are either classified as held for trading or designated as fair valuethrough profit or loss. Derivatives are classified as held for trading unless designated as hedges. Other financialassets and financial liabilities may be designated at fair value through profit or loss where this eliminates anaccounting mismatch, or where they are managed on a fair value basis.(ii) Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixedmaturity for which there is a positive intention and ability to hold to maturity, other than those that are designatedon initial recognition as either fair value through profit or loss or available-for-sale, or meet the definition of loansand receivables.(iii) Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quotedin an active market. Trade and other receivables are classified as loans and receivables.(iv) Available-for-sale financial assetsAvailable-for-sale financial assets are non-derivative financial assets that are either designated in this category ornot classified in any of the other categories. Fair value changes are recognised directly in equity until theinvestment is either derecognised or determined to be impaired, at which time the cumulative gain or loss thatwas reported in equity is recognised in the income statement.(v) Financial liabilities measured at amortised costFinancial liabilities measured at amortised cost are non-derivative financial liabilities with fixed or determinablepayments that are not quoted in an active market. Trade and other payables, and debt instruments are classifiedas financial liabilities measured at amortised cost.f) Cash and cash equivalentsCash and cash equivalents comprise cash on hand, deposits held at call with banks, other short term highly liquidinvestments with original maturities of three months or less, and bank overdrafts.

Fonterra Co-operative Group LimitedStatement of significant accounting policiesFor the 14 months ended 31 July 200835g) Trade receivablesTrade receivables are carried at their net realisable value.h) BorrowingsBorrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequentlymeasured at amortised cost using the effective interest method, with the hedged risks on certain debt instrumentsmeasured at fair value. Changes in fair value of those hedged risks are recognised in the income statement.Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlementof the liability for at least 12 months after balance date.i) Trade and other payablesTrade and other payables are carried at amortised cost.j) Derivative financial instruments and hedging activitiesThe Company uses derivative financial instruments within predetermined policies and limits in order to reduce theFonterra Group’s exposure to fluctuations in foreign currency exchange rates and interest rates.The Company does not engage in speculative transactions or hold derivative financial instruments for tradingpurposes.Derivatives are initially recognised at fair value on the date a derivative contract is entered into (the trade date)and transaction costs are expensed immediately. They are subsequently remeasured to their fair value.The Company designates certain derivatives as hedges of the fair value of recognised assets or liabilities, or afirm commitment (fair value hedges).The Company documents, at the inception of the transaction, the relationship between hedging instruments andhedged items, as well as its risk management objectives and strategy for undertaking various hedgingtransactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, ofwhether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values ofhedged items.The full fair value of a hedging derivative is classified as a non-current asset or liability when maturity of theFonterra Group’s hedged item exceeds 12 months. It is classified as a current asset or liability when the maturityof the hedged item is less than 12 months.Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in theincome statement, together with any changes in the fair value of the hedged asset or liability attributable to thehedged risk.If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedgeditem for which the effective interest method is used is amortised to profit or loss over the period to maturity.k) Property, plant and equipmentOwned assetsItems of property, plant and equipment are measured at cost less accumulated depreciation and impairmentlosses. Cost includes the purchase consideration and those costs directly attributable to bringing the asset to thelocation and condition necessary for its intended use. Costs cease to be capitalised when substantially all theactivities necessary to bring an asset to the location and condition for its intended use are complete. Subsequentcosts are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when itis probable that future economic benefits associated with the item will flow to the Company and the cost of theitem can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs andmaintenance are charged to the income statement during the financial period in which they are incurred.The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each financial year end.Gains and losses on disposals are determined by comparing the proceeds with the carrying amount, and arerecognised in the income statement.

Fonterra Co-operative Group LimitedStatement of significant accounting policiesFor the 14 months ended 31 July 200836DepreciationDepreciation is calculated on a straight line basis to allocate the cost of the asset, less any residual value, over itsestimated useful life. The range of estimated useful lives for each class of property, plant and equipment is asfollows:LandBuildings and leasehold improvementsPlant, vehicles and equipmentIndefinite15 – 50 years3 – 50 yearsLeased assetsLeases of property, plant and equipment where the Company assumes substantially all the risks and rewards ofownership are classified as finance leases.Assets under finance leases are recognised as property, plant and equipment in the balance sheet. They arerecognised initially at their fair value, or if lower, at the present value of the minimum lease payments. Acorresponding liability is established and each lease payment allocated between the liability and interest expenseusing the effective interest method. The assets recognised are depreciated on the same basis as equivalentproperty, plant and equipment.Leases that are not finance leases are classified as operating leases and the assets are not recognised on theCompany’s balance sheet. Operating lease payments are recognised as an expense on a straight line basis overthe term of the lease.l) Intangible assetsComputer softwareAcquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to usethe specific software. These costs are amortised over their estimated useful lives, being three to eight years.Costs associated with developing or maintaining computer software programmes are recognised as an expenseas incurred. Costs that are directly associated with the development of identifiable and unique software productscontrolled by the Company, and that will generate economic benefits exceeding costs beyond one year, arerecognised as intangible assets. Costs include the employee costs incurred as a result of developing softwareand an appropriate portion of relevant overheads.Computer software development costs recognised as assets are amortised over their estimated useful lives,being three to eight years.Research and development expenditureAll research expenditure is recognised in the income statement as incurred. Significant development expenditureis recognised as an asset when it can be demonstrated that the commercial production of the material or product,or use of the process, will commence.Development expenditure recognised as an asset is stated at cost and amortised over the period of expectedbenefits on a straight line basis, not exceeding five years. Amortisation begins at the time that commercialproduction or use of the process commences. All other development expenditure is recognised in the incomestatement as incurred.m) Impairment of non-financial assetsIntangible assets that have an indefinite useful life are not subject to amortisation and are tested annually forimpairment. Other assets are tested for impairment whenever events or changes in circumstances indicate thatthe carrying amount may not be recoverable. If the estimated recoverable amount of an asset is less than itscarrying amount, the asset is written down to its estimated recoverable amount and an impairment loss isrecognised in the income statement. The recoverable amount of an asset is the higher of its fair value less coststo sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest level forwhich there are separately identifiable cash inflows (cash-generating units).Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment at eachreporting date.

Fonterra Co-operative Group LimitedStatement of significant accounting policiesFor the 14 months ended 31 July 200837n) ProvisionsProvisions are recognised only in those circumstances where the Company has a present legal or constructiveobligation as a result of a past event, when it is probable that an outflow of resources will be required to settle theobligation, and a reliable estimate of the amount can be made.Provisions are measured at the present value of the expenditures expected to be required to settle the obligationusing a pre-tax discount rate that reflects current market assessments of the time value of money and the risksspecific to the obligation. The increase in the provision due to the passage of time is recognised as a finance costin the income statement.o) Co-operative sharesCo-operative shares are classified as equity. Incremental costs directly attributable to the issue of co-operativeshares are recognised as a deduction from equity.p) Revenue recognitionRevenue from the sale of goods is recognised at the fair value of the consideration received or receivable, net ofreturns, discounts and allowances. Revenue is recognised when the amount of revenue can be reliablymeasured, significant risks and rewards of ownership of the inventory items have passed to the buyer, recovery ofthe consideration is probable, the associated costs and possible return of goods can be estimated reliably, andthere is no continuing management involvement with the goods.Dividend income is recognised when the right to receive payment is established.q) Payout to suppliersPayout to shareholder suppliers comprises Cost of Milk, Supplier Premiums and Value Return.Cost of MilkThe Cost of Milk comprises the volume of milk solids supplied by shareholders at the Milk Price for the season.Milk Price for the season is based upon a model determined by an independent valuer as part of the fair valueshare process, and broadly represents the maximum amount a hypothetical efficient competitor could afford topay for milk and still make an adequate return on capital. The monthly commodity prices and hedged conversionrates achieved or forecast to be achieved by Fonterra are applied to this model to establish the Milk Price. MilkPrice is recognised within cost of goods sold.Supplier PremiumsSupplier Premiums are paid for specialty milks, such as winter milk and colostrum. Supplier Premiums arerecognised within cost of goods sold.Value ReturnThe Value Return is comprised of payout to shareholder suppliers less the Cost of Milk and Supplier Premiums.Value Return is recognised directly in equity.For accounting purposes the Value Return payout made to shareholder suppliers is treated as a transaction withthem in their capacity as shareholders. For the presentation of the interim financial statements the Value Returnpayment can not be reliably estimated and is therefore recognised within cost of goods sold as part of the totalpayout to shareholder suppliers. For presentation of the annual report, the Value Return payment is presented asa deduction directly from equity.Payment for contract milk supplied is included in other purchases within cost of goods sold.r) Employee benefitsEmployee benefits primarily include short term employee benefits and defined contribution pension plans.Short term employee benefits include salaries, wages, annual leave and sick leave, and are expensed on anundiscounted basis as the relevant service is provided.Contributions to defined contribution pension plans are recognised as an expense in the period they are due. TheCompany has no further payment obligations once the contributions have been paid.

Fonterra Co-operative Group LimitedStatement of significant accounting policiesFor the 14 months ended 31 July 200838s) Finance income and costsFinance income comprises interest income on funds on deposit. Interest income is recognised as it accrues usingthe effective interest method.Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, gains andlosses on the revaluation of debt hedges and the hedged risks on certain debt instruments, and gains and lossesrelating to forward points on forward exchange contracts. Interest expense and the unwinding of the discount onprovisions are recognised in the income statement using the effective interest method. Borrowing costs directlyattributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost ofthat asset.t) TaxationTax expense comprises current and deferred tax. Tax expense is recognised in the income statement except tothe extent that it relates to items recognised directly in equity, in which case it is recognised in equity.Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax ratesenacted or substantively enacted at the reporting date, and any adjustment to tax payable or receivable in respectof previous years.Deferred tax is recognised, using the balance sheet method, on temporary differences arising between the taxbases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is measured atthe tax rate that is expected to apply to the temporary differences when they reverse, based on laws that havebeen enacted or substantively enacted by the reporting date.Deferred tax is not recognised on the following temporary differences:− The initial recognition of assets and liabilities in a transaction that is not a business combination and thataffects neither accounting nor taxable profit; and− Differences relating to investments in subsidiaries to the extent that the timing of the reversal is controlledby the Company and it is probable that they will not reverse in the foreseeable future.Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available againstwhich the temporary differences can be utilised.u) New International Financial Reporting StandardsThe Company has chosen to early adopt amendments made in February 2008 to NZ IAS 32: FinancialInstruments: Presentation. The amendments allow the Company to continue to classify Fonterra’s co-operativeshares as equity instruments. Mandatory adoption of the amendments to NZ IAS 32 is required for periodscommencing on or after 1 January 2009.Fonterra has chosen to early adopt the amendments made in June 2008 to NZ IFRS 1: First-time Adoption of NZIFRS and NZ IAS 27: Consolidated and Separate Financial Statements. The amendments allow Fonterra to usethe Previous NZ GAAP carrying value of its investments in subsidiaries as the deemed cost on transition to NZIFRS. Mandatory adoption of the amendments to NZ IFRS 1 and NZ IAS 27 and their related consequentialamendments is required for periods commencing on or after 1 January 2009.The Company has chosen not to early adopt amendments made in November 2007 to NZ IAS 1: Presentation ofFinancial Statements. The amendments set out changes to the presentation of the financial statements but haveno impact on recognition or measurement. Mandatory adoption of the amended NZ IAS 1 is required for periodscommencing on or after 1 January 2009, therefore the Company will adopt these amendments in the financialyear beginning 1 August 2009.The Company has chosen to early adopt NZ IFRS 8: Operating Segments. NZ IFRS 8 requires qualitative andquantitative disclosures regarding the Company’s operating segments and replaces NZ IAS 14: SegmentReporting. Mandatory adoption of NZ IFRS 8 is required for periods commencing on or after 1 January 2009.

39Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 20081. Cost of goods sold 402. Operating (loss) before finance cost and tax 403. Net finance income 404. Tax credit 415. Capital and reserves 426. Trade and other receivables 447. Property, plant and equipment 448. Intangible assets 459. Trade and other payables 4610. Provisions 4611. Borrowings 4712. Deferred taxation 4813. Capital notes 4814. Operating cash flows 4915. Financial risk management 5016. Contingent liabilities 5517. Commitments 5618. Segment reporting 5619. Related party transactions 5720. Investment in subsidiaries 5921. Subsequent events 6022. Explanation of transition to NZ IFRS 60

40Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 20081 Cost of goods sold14 months to31 July 2008$ million12 months to31 May 2007Cost of milk 8,978 4,812Supplier premiums 33 52Payout to shareholder suppliers included in cost of goodssold9,011 4,864Other purchases 187 6Total cost of goods sold 9,198 4,870Fonterra processes approximately 95% of all New Zealand milk and accordingly there is not a market based pricefor raw milk acquired in New Zealand. The cost of milk is based on the Milk Price which is an estimate as it relieson a model using a combination of actual and forecast sales.2 Operating (loss) before finance costs and tax14 months to31 July 2008$ million12 months to31 May 2007The following items have been included in arriving atoperating (loss) before finance costs and taxAuditor’s remuneration:- Audit fees 2 2- Other audit related services (1) 1 1Operating lease expense 5 4Restructuring costs 1 19Research costs 1 1Gain on disposal of property, plant and equipment - 1Total employee benefits expense 181 111Included in employee benefits expense arecontributions to defined contribution plans 1 1Note:(1) Other audit related services include services for financial and IT controls assurance.3 Net finance income14 months to31 July 2008$ million12 months to31 May 2007Interest income 497 372Interest expense on financial liabilities measured atamortised cost (408) (294)Change in fair value of hedged risks on debt instrumentsdesignated in a fair value hedge relationship (184) 336Change in fair value of derivative instruments designatedas a fair value hedge 14 (451)Change in fair value of financial instruments classified asheld for trading 177 69Finance costs (401) (340)Net finance income 96 32

41Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 20084 Tax credit14 months to31 July 2008$ million12 months to31 May 2007Current tax credit 90 35Current tax – reduction in tax rate (15) -Prior period adjustments to current tax 5 (1)Deferred tax expense – origination and reversal oftemporary differences 4 52Deferred tax expense – reduction in tax rate - (15)Tax credit 84 71(Loss) before tax (342) (277)Prima facie taxation expense at 33% (113) (91)Add/(deduct) taxation effect of:Non-deductible expenses 19 4(Over)/under provision prior year (5) 1Impact of change in tax rate 15 15Tax (credit) (84) (71)Imputation credits:Opening balance 8 27Tax payments net of refund - (19)Closing balance 8 8The imputation credits are available to the shareholder suppliers of the parent company:Through the Company 8 8Through subsidiaries 10 918 17Dividend withholding payment credits:The dividend withholding payment credits are available to the shareholder suppliers of the parentcompany:Through the Company - -Through subsidiaries 1 11 1In May 2007 the New Zealand Government announced that the company tax rate would reduce from 33% to 30%,effective for years beginning on or after 1 April 2008.

42Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 20085 Capital and reserves$ millionsCo-operativesharesPeaknotesSupplyredemptionrightsAccumulatedlossTotalequityBalance at 1 June 2007 4,897 - - (632) 4,265(Loss) for the period (before Value Return) - - - (258) (258)Value Return paid to shareholder suppliers - - - (87) (87)Tax credit arising on Value Return paid toshareholder suppliers- - - 28 28Co-operative shares issued 754 - - - 754Co-operative shares surrendered (1,354) - - - (1,354)Balance at 31 July 2008 4,297 - - (949) 3,348Balance at 1 June 2006 3,569 1,149 285 62 5,065(Loss) for the period (before Value Return) - - - (206) (206)Value Return paid to shareholder suppliers - - - (728) (728)Tax credit arising on Value Return paid to- - - 240 240shareholder suppliersCo-operative shares issued 1,699 - - - 1,699Co-operative shares surrendered (316) - - - (316)Supply redemption rights price differential (55) - - - (55)Surrender of supply redemption rights and peaknotes- (1,149) (285) - (1,434)Balance at 31 May 2007 4,897 - - (632) 4,265Numbers 000’sCo-operativesharesPeak notesSupplyredemptionrightsBalance at 1 June 2007 1,279,675 - -Issued 127,543 - -Surrendered (207,305) - -Balance at 31 July 2008 1,199,913 - -Balance at 1 June 2006 1,208,085 38,307 59,144Issued 285,790 - -Surrendered (52,950) (38,307) (59,144)Consolidation transition (161,250) - -Balance at 31 May 2007 1,279,675 - -

43Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008Co-operative sharesEach shareholder supplying milk to the Company in a season is required to hold one co-operative share (“share”)for each kilogram of milksolids obtainable from milk supplied to the Company by that shareholder, excluding milksupplied under contract supply or as unshared supply, in that season. Shareholders supplying under contractmust hold at least 1,000 shares. This is known as the share standard.In addition, suppliers are able to hold up to 20% of their opening shareholding as additional shares.Rights attaching to the shares include:− voting rights on a poll or postal ballot of one vote per 1,000 kilograms of milksolids obtainable from milksupplied to the Company by a dairy farm during the season preceding that in which a poll or postal ballot istaken, less milksolids supplied under contract supply or as unshared supply;− rights to a share in any Value Return; and− rights to share in any surplus on liquidation of the Company.Shares are issued and surrendered at fair value. Shareholders may also elect, within the application period (15December – 28 February), to issue and surrender shares at a default price which is +/- 7.5% of the interim fairvalue share price set by the Board of Directors (“the Board”). Fair value is determined on an annual basis foreach season by the Board with the advice of an independent valuer. Fair value for the 2008/09 season has beenset by the Board, after receiving Duff & Phelps estimated fair value range, at $5.57 per share (2007/08 season:$6.79 per share).If a shareholder decreases supply during a season, the number of shares held will be re-apportioned between thenumber of minimum required shares (calculated using the share standard) and the number of additional sharesthat may be held. The retention of any additional shares will be automatic, up to 20% of a shareholder’s openingcapital, subject to Board discretion.Any number of shares held in excess of the share standard that exceed 20% of a shareholder’s opening capitalwill automatically be surrendered, subject to Board discretion, at the current season share price. A shareholdermay elect to surrender additional shares held in excess of the share standard but not exceeding 20% of theiropening capital.Payment for the surrender of shares may be made at the option of the Company by:− the payment of cash; or− the issue of capital notes.The Company also has the option to pay the surrender value in special circumstances by the issue of redeemablepreference shares.The expected cash outflow on redemption or repurchase of the shares is dependent on the fair value at that time,the number of shares redeemed or repurchased and the instrument used to settle the obligation, and accordinglycannot be reliably estimated.If a shareholder increases supply during a season, any additional shares held will be used first to satisfy theincreased minimum required shares under the share standard. If no, or insufficient, additional shares are held,the shareholder may:− acquire the extra shares required under the share standard at the current season share price; or− request unshared supply (at the discretion of the Company).The amount of unshared supply entitlement shall not exceed 20% of a shareholder’s opening capital or theincrease in total production over the previous season. If a shareholder is granted unshared supply, they will notbe required to purchase shares for the quantity elected. However, they will receive a lower payout for thisunshared supply.Additional shares acquired by shareholders are paid by:− cash; or− redeeming any capital notes held (at the discretion of the Company – not exercised to date).

44Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 20086 Trade and other receivablesAs at31 July 2008$ millionAs at31 May 2007Trade receivables 2 1Less: provision for impairment of trade receivables - -Trade receivables less provision for impairment 2 1Receivables from related parties (1) 8,055 7,155Total receivables 8,057 7,156Prepayments 36 10Total trade and other receivables 8,093 7,166Note:(1) There are no provisions for impairment on the receivables from related parties.7 Property, plant and equipment$ million Notes LandBuildings andleaseholdimprovementsPlant,vehiclesandequipment Capital WIP TotalNet book valueBalance as at 1 June 2007 6 12 7 8 33Additions - - - 19 19Transfers from subsidiaries - 18 20 - 38Transfer from capital WIP - 1 7 (8) -Transfer to intangible assets 8 - - - (5) (5)Depreciation charge - (2) (6) - (8)Disposals - - (3) - (3)Balance as at 31 July 2008 6 29 25 14 74At 31 July 2008Cost 6 40 64 14 124Accumulated depreciation and impairment - (11) (39) - (50)Net book value 6 29 25 14 74Net book valueBalance as at 1 June 2006 6 12 11 5 34Additions - - - 5 5Transfer from capital WIP - 1 1 (2) -Depreciation charge - (1) (5) - (6)Balance as at 31 May 2007 6 12 7 8 33At 1 June 2006Cost 6 14 26 5 51Accumulated depreciation and impairment - (2) (15) - (17)Net book value 6 12 11 5 34At 31 May 2007Cost 6 15 26 8 55Accumulated depreciation and impairment - (3) (19) - (22)Net book value 6 12 7 8 33

45Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008Government valuations of land and buildingsThe aggregate of the latest Government valuations of land and buildings, and the cost of any additions to the landand buildings subsequent to the relevant valuation was as follows. All government valuations were effective 1September 2006.$ million LandBuildings andleaseholdimprovements TotalGovernment valuation 7 16 23Subsequent additions/(disposals) - 30 30Value as at 31 July 2008 7 46 53Government valuation 7 16 23Subsequent additions/(disposals) - - -Value as at 31 May 2007 7 16 238 Intangible assets$ million Notes SoftwareNet carrying amountAt 1 June 2007 43Acquired 14Transfer from Capital WIP 7 5Transfers to subsidiaries (21)Amortisation (11)Balance as at 31 July 2008 30At 31 July 2008Cost 101Accumulated amortisation and impairment (71)Net carrying amount 30Net carrying amountAt 1 June 2006 34Acquired 20Amortisation (11)At 31 May 2007 43At 1 June 2006Cost 80Accumulated amortisation and impairment (46)Net carrying amount 34At 31 May 2007Cost 100Accumulated amortisation and impairment (57)Net carrying amount 43Amortisation, impairment losses and reversal of impairment losses are recognised in other operating expenses inthe income statement.Software may include internally generated capitalised development costs.

46Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 20089 Trade and other payablesAs at31 July 2008$ millionAs at31 May 2007Accruals 40 28Amounts due to related parties 6,297 5,435Other payables 46 33Total current payables and accruals (excluding employeeentitlements) 6,383 5,496Employee entitlements 46 16Total trade and other payables 6,429 5,51210 Provisions14 months to31 July 2008$ million12 months to31 May 2007Provision for restructuring and rationalisation:Opening balance 23 21Additional provisions 1 19Charged to income statement 1 19Reclassification within note - (2)Utilised during the period (18) (15)Closing balance 6 23Legal claims provisions:Opening balance 36 38Additional provisions 23 8Unused amounts reversed (1) (6)Charged to income statement 22 2Utilised during the period (1) (3)Transferred to subsidiaries (3) (1)Closing balance 54 36Other provisions:Opening balance 24 18Additional provisions 40 28Unused amounts reversed (2) -Charged to income statement 38 28Reclassification within note - 2Utilised during the period (9) (19)Transferred to subsidiaries - (5)Closing balance 53 24Total provisions 113 83Included within the balance sheet as follows:Current liabilities 66 51Non-current liabilities 47 32Total provisions 113 83

47Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008The nature of the provisions are as follows:− The provision for restructuring and rationalisation includes obligations relating to planned changesthroughout the business to improve efficiencies and reduce costs. None of the provisions are individuallysignificant. The value of the obligation is based on project plans, and the provisions are expected to beutilised in the next year.− The legal claims provisions include obligations relating to tax, customs and duties and other legal mattersarising in the normal course of business. None of the provisions are individually significant. The timingand amount of the future obligations are uncertain, as they are contingent on the outcome of a number ofjudicial proceedings. The amount recognised has been based on management’s best estimate of theamount that will be required to settle the obligation. The outcome of most of the obligations is notexpected to be determined within the next year, and therefore most of the provision is classified as noncurrent.Of the non-current provision, more than half (31 May 2007: all) is expected to be incurred within 5years and the timing of the remainder uncertain.− Other provisions arise in the normal course of business and relate to provisions for areas such asemployee benefit provisions. None of the provisions are individually significant. The value of theobligation is based on management’s best estimate of the amount that will be required to settle theobligation, and the provisions are expected to be utilised in the next year.11 BorrowingsNotesWeightedaverageinterest rate$ million $ millionAs at Weighted As at31 July 2008 average 31 May 2007interest rateCurrentCommercial paper 6.1% 1,605 4.7% 517Unsecured bank loans 2.5% 25 7.8% 15Medium term notes 5.0% 210 8.5% 300Total current borrowings 15 1,840 832Non-currentUnsecured bank loans - - 8.0% 910Medium term notes 5.9% 2,886 5.1% 2,198Total non-current borrowings 15 2,886 3,108Total borrowings 4,726 3,940The weighted average interest rates disclosed are before the effect of any hedging.

48Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 200812 Deferred taxationAs at31 July 2008$ millionAs at31 May 2007Deferred taxation comprises the following:Property, plant and equipment 8 7Intangible assets (9) (8)Financial instruments (11) (16)Employee entitlements 6 5Receivables, payables & provisions 33 14New Zealand tax losses 122 143149 145Movements for the period:Opening balance 145 108Recognised in profit or loss 4 52Change in tax rate recognised in profit or loss - (15)Closing balance 149 145Deferred tax balances are presented in the balance sheet asfollows:Deferred tax assets 149 145149 14513 Capital notesThe capital notes are unsecured subordinated interest bearing obligations. Interest is payable on a quarterlybasis at a rate of 8.74% per annum (31 May 2007: 8.62%). This rate is reset on 10 July each year.The capital notes have no fixed maturity date and continue in existence until redeemed by the Company on anelection date, or otherwise purchased by the Company through the secondary market, or off market afterallotment with agreement from the holder, or are redeemed or purchased by the Company from its shareholdersin accordance with the Company’s constitution. The capital notes have an election date of 10 July in each year.The Company has the option to redeem all or part of the capital notes for cash on each election date.

49Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 200814 Operating cash flowsNotes14 months to31 July 2008$ million12 months to31 May 2007(Loss) for the period (before Value Return) (258) (206)Non-cash items:Amortisation of intangible assets 8 11 11Depreciation 7 8 6Movement in deferred taxation 12 (4) (40)Gain on disposal of property, plant and equipment - (1)15 (24)Movement in working capital decrease/(increase):Movement in receivables and prepayments (26) (385)Movement in other current assets 519 -Movement in current taxation balances 103 (65)Movement in amounts due to and from Fonterra Group’sequity accounted investees- (22)Movement in owing to suppliers 95 282Movement in payables and accruals 92 (28)Movement in provisions 15 10798 (208)Items classified as investing and financing activities (577) 215Net cash flows from operating activities (22) (223)There were no material non-cash transactions during the period, or for the year ended 31 May 2007.

50Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 200815 Financial risk managementOverviewExposure to foreign exchange, interest rate, credit and liquidity risks arise in the normal course of the Company’sbusiness.The Board has overall responsibility for the establishment and oversight of the Company’s risk managementframework. The Board:− has established risk management procedures to identify and analyse the risks faced by the Company;− has approved a Treasury Policy that covers appropriate risk limits and controls (including but not limited todelegated authority levels and authorised use of various financial instruments); and− monitors risks and adherence to limits.The Company’s overall risk management programme focuses primarily on maintaining a prudent risk profile thatprovides flexibility to implement the Company’s strategies, while ensuring the optimisation of the return on assets.Risk management is carried out by a central treasury department (“Group Treasury”), which ensures compliancewith the risk management policies and procedures set by the Board.Foreign exchange riskForeign exchange risk is the risk of cash flow volatility arising from a movement in foreign exchange rates towhich the Company may be exposed.The Company operates internationally and is exposed to foreign exchange risk on borrowings and throughcurrency derivatives held for risks elsewhere in the group that are denominated in foreign currencies.The main impacts of foreign exchange movements on the Company arise from:− transaction risk – variations in the New Zealand dollar value to settle currency derivatives and interest onforeign currency borrowings; and− translation risk – the value of the Company’s foreign currency debt.The Company’s objective is to ensure foreign exchange exposure is managed in a prudent manner in order tomaximise the returns to shareholder suppliers.The Company uses cross currency interest rate swaps to hedge its foreign exchange risk in relation to foreigncurrency debt. The Company carries economic hedge derivative contracts for risks that sit elsewhere in theFonterra Group.Exposure to foreign currency riskThe Company has the following exposure to foreign currency monetary items, which arise primarily fromborrowings and derivative financial instruments.Conversion rate$ millionAs at As at As at As atNotes 31 July 2008 31 May 2007 31 July 2008 31 May 2007USD United States dollar 0.73 0.73 (5,672) (6,710)EUR Euro dollar 0.47 0.54 (447) (408)AUD Australian dollar 0.78 0.89 (1,103) (91)GBP Great Britain pound 0.37 0.37 (50) (35)JPY Japanese yen 79.36 88.80 (48) (15)BRL Brazilian real 1.15 1.42 (103) (79)CLP Chilean peso 373.16 384.22 (190) (131)CNY Chinese yuan 5.00 5.58 (131) (98)SGD Singapore dollar 1.00 - (310) -The Company has no sensitivity to foreign exchange movements as gains and losses are passed to a subsidiarythrough a novation agreement.

51Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008Interest rate riskThe Company’s interest rate risk arises from its borrowings and funds on deposit. Borrowings issued and fundson deposit held at variable rates expose the Company to cash flow interest rate risk. Borrowings issued at fixedrates expose the Company to fair value interest rate risk.The Company borrows a mixture of fixed and variable rate debt in a range of currencies. The Company activelyhedges its repricing profile using interest rate swaps in accordance with its Treasury Policy in order to minimisethe cost of debt and manage the volatility of finance costs. The Company’s benchmark is to ensure between 20%and 55% of interest payments are fixed depending upon the maturity of the debt.Exposure to interest rate riskSensitivities to interest rate risk have been assessed on the basis of a 100 basis point movement in interest rates.A 100 basis point movement is considered reasonably possible over the short term. Sensitivities are presentednet of tax based on a tax rate of 33%.Fair value sensitivity analysisA change in interest rates impacts the fair value of the Company’s fixed rate debt instruments and its interest ratederivatives. Fair value changes impact on profit or loss for all interest rate derivatives and where hedged risks oncertain debt instruments are recognised at fair value. All such fair value changes are recognised in the incomestatement. The fair value sensitivity to a 100 basis point movement in interest rates (based on financial assetsand liabilities held at the reporting date) is as follows:$ millionAs atAs at31 July 2008 31 May 2007Fair value gain/(loss) from 100 bp increase 41 38Fair value gain/(loss) from 100 bp decrease (44) (41)Cash flow sensitivity analysisA change in the interest rates would also impact on interest payments and receipts on the Company’s floating ratedebt instruments (including the floating leg of any interest rate derivatives) recognised in the income statement.The cash flow sensitivity to a 100 basis point movement in interest rates (based on financial assets and liabilitiesheld at the reporting date) is as follows:$ millionAs atAs at31 July 2008 31 May 2007One year cash flow impact of 100 bp increase 16 13One year cash flow impact of 100 bp decrease (16) (13)

52Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008Credit riskCredit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument failsto meet its contractual obligations, and arises principally from the Company’s receivables from customers.The Company has no trade and other receivables that are past due (31 May 2007: nil).The Company limits its exposure to credit risk by investing in liquid securities and entering into derivativeinstruments with counterparties that have a credit rating of at least ‘A-’ from Standard and Poor’s or equivalent.Given this high credit rating threshold, management does not expect any counterparty to fail to meet itsobligations.The maximum credit risk on cash and cash equivalents, trade and other receivables, derivative financialinstruments and other investments is best represented by their carrying values.The maximum credit risk in relation to financial guarantees the Company and the Fonterra Group have providedto the Fonterra Group’s equity accounted investees is $62 million (31 May 2007: $66 million). The Company andFonterra Group have also provided a financial guarantee to an external party with a maximum credit risk of $23million (31 May 2007: $7 million). The Company has provided financial guarantees for subsidiaries for which themaximum credit risk is $279 million (31 May 2007: nil).Liquidity riskLiquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. TheCompany’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet itsliabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or riskingdamage to the Company’s reputation.Typically the Company ensures that it has sufficient cash or facilities on demand to meet expected operationalexpenses for a period of at least 80 days, including the servicing of financial obligations; this excludes thepotential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters,although back-up funding lines are maintained for such situations.Group Treasury manages the Company’s liquidity by retaining cash and marketable securities, the availability offunding from an adequate amount of committed credit facilities and the ability to close out market positions. Atbalance date the Company had undrawn lines of credit totalling $2,700 million (31 May 2007: $2,355 million).

53Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008Exposure to liquidity risk$ millionCarryingamountContractualcash flowsAs at As at31 July 2008 31 May 20073 monthsMore than Carrying Contractual 3 monthsor less 3-12 months 1-5 years 5 years amount cash flows or less 3-12 months 1-5 yearsMore than5 yearsNon-derivative financial liabilitiesBorrowings- Commercial paper (1,605) (1,638) (858) (780) - - (517) (524) (193) (331) - -- Unsecured bank loans (25) (25) (6) (19) - - (925) (994) (22) (62) (910)-- Finance lease liabilities - - - - - -- - - - - -- Medium term notes (3,096) (4,024) (35) (353) (2,325) (1,311) (2,498) (3,202) (23) (421) (1,304) (1,454)Capital notes (35) (51) (1) (2) (13) (35) (35) (51) (1) (2) (13) (35)Bank overdrafts - - - - - - (40) (40) (40) - - -Trade and other payables (1,155) (1,155) (1,155) - - - (1,035) (1,035) (1,035) - - -(5,916) (6,893) (2,055) (1,154) (2,338) (1,346) (5,050) (5,846) (1,314) (816) (2,227) (1,489)Derivative financial instrumentsGross settled derivativesGross settled derivatives - Outflow (18,156) (8,133) (5,010) (4,299) (714) (16,574) (5,800) (6,440) (3,330) (1,004)Gross settled derivatives - Inflow 17,563 7,981 4,807 4,200 575 16,333 6,006 6,634 2,807 886(219) (593) (152) (203) (99) (139) 213 (241) 206 194 (523) (118)Net settled derivatives (1) (13) 7 34(15) (39) 8 (63) (5) 31 20 (109)Amounts due to subsidiaries and repayable on demand (refer notes 9 and 19) have been excluded from the above table.

54Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008Financial instrument classificationsAll financial assets other than derivatives are classified as ‘loans and receivables’. All financial liabilities otherthan derivatives are classified as ‘other amortised cost’.$ millionAs atAs at31 July 2008 31 May 2007Loans and receivables 8,526 7,161Other amortised cost (12,213) (10,485)Derivative assetsDesignated in hedge relationships 125 -Not designated in hedge relationships (1) 157 825282 825Derivative liabilitiesDesignated in hedge relationships (195) (273)Not designated in hedge relationships (1) (307) (331)(502) (604)Note:(1) Derivatives that are not designated in hedge relationships for hedge accounting purposes are still entered into by theCompany as economic hedges over currency and interest rate exposure.Fair valuesThe carrying values of financial instruments approximate their fair values other than as noted below:$ millionAs at 31 July 2008Carrying value Fair valueCommercial paper (1,605) (1,607)Unsecured bank loans (25) (25)Medium term notes (3,096) (3,070)As at 31 May 2007Carrying valueFair valueUnsecured bank loans (925) (913)Medium term notes (2,498) (2,506)Capital notes (35) (39)Basis for determining fair valuesThe fair value of forward exchange contracts, currency options and collars, and cross currency interest rateswaps is based on their market price or generally accepted valuation methodologies.The fair value of interest rate swaps is based on accepted valuation methodologies. These prices are tested forreasonableness by discounting estimated future cash flows based on the terms and maturity of each contract andusing market interest rates for a similar instrument at the reporting date.The fair values of financial liabilities are calculated by discounting the future contractual cash flows at the currentmarket interest rates that are available for similar financial instruments.

55Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008Capital managementThe capital management policies are established and applied to the Fonterra Group as a whole, not the Companyindividually.The Board’s policy is to maintain a strong capital base so as to maintain shareholder, creditor and marketconfidence and to sustain future development of the business.The Fonterra Group’s objective is to provide returns for shareholders and benefits for the other stakeholders andto maintain an optimal capital structure to reduce the cost of capital. The Fonterra Group distributes its surplus byway of payout. In order to retain or modify the capital structure, the Fonterra Group may decide to retain profitswithin the business.The Board primarily monitors capital on the basis of the gearing ratio. This ratio is calculated as net interestbearing debt divided by total capital. Net interest bearing debt is calculated as total borrowings less cash andcash equivalents. Total capital is calculated as equity, as presented on the balance sheet (excluding the cashflow hedge reserve), plus net interest bearing debt.The Fonterra Group’s target is to achieve a gearing ratio of between 45% and 55%. For the period ending 31 July2008 the gearing ratio was 57% (31 May 2007: 51%). The current gearing ratio, driven both by high commodityprices and end of season equity adjustments, is above the Board’s target level. An action plan is beingimplemented to return to the target level.The Fonterra Group is not subject to externally imposed capital requirements.16 Contingent liabilitiesThe Company has no contingent liabilities as at 31 July 2008 (31 May 2007: nil).In the normal course of its business Fonterra is exposed to claims, legal proceedings and arbitrations that may insome cases result in costs to the Company. The Directors believe that these have been adequately provided forby the Company and there are no additional legal proceedings or arbitrations that are pending at the date of thesefinancial statements that require provision or disclosure.

56Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 200817 CommitmentsAs at31 July 2008$ millionAs at31 May 2007Capital expenditure and intangible assetcommitmentsCapital expenditure and intangible assets contracted for at balance date but not recognised in the financialstatements are as follows:Plant, vehicles and equipment 1 1Intangible assets 2 2Total capital commitments 3 3As at31 July 2008$ millionAs at31 May 2007Operating lease commitmentsThe Company leases premises, plant and equipment. The future aggregate minimum lease paymentsunder non-cancellable operating leases are as follows:Less than one year 5 5One to five years 11 13Greater than five years 15 4Total operating lease commitments 31 2218 Segment reportingThe Company operates in one operating segment, defined by product type and geographic area, being thecollection and sale of milk (to a subsidiary) in New Zealand. This reflects how the Company’s operations aremanaged by the Fonterra Leadership Team, who are the chief operating decision makers.These financial statements therefore provide information about the business activities of the operating segment.

57Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 200819 Related party transactionsNote 20 identifies all significant subsidiaries. All of these entities and key management personnel are relatedparties of the Company. Other related parties include entities controlled by or significantly influenced by keymanagement personnel or their close family members.Key management personnel include the Board and the Fonterra Leadership Team. The Board received Directors’fees totalling $2 million for the 14 months ended 31 July 2008 (year ended 31 May 2007: $2 million). TheFonterra Leadership Team received short term employee benefits of $12 million (year ended 31 May 2007: $9million) and termination benefits of $1 million (year ended 31 May 2007: nil).Other related party transactions are as follows:i) Sales and purchases$ million14 months to 12 months to31 July 2008 31 May 2007Sales of goods:Subsidiaries 9,198 4,8709,198 4,870Sales of services:Subsidiaries 31 431 4Goods sold to related parties are primarily commodity products and are provided on an arms length basis, undernormal trade terms.Services provided to related parties include management fees and are provided on an arms length basis, undernormal trade terms.$ million14 months to 12 months to31 July 2008 31 May 2007Purchases of goods:Subsidiaries 19 10Key management personnel 210 103229 113Goods purchased from related parties are primarily commodity products, which are acquired on an arms lengthbasis and under normal trade terms.ii)Period end balances arising from sales/purchases of goods/servicesProvisions for doubtful debts on related party balances are disclosed in note 6.As at31 July 2008$ millionAs at31 May 2007Receivables from related parties:Subsidiaries 19 1719 17Payables to related parties:Subsidiaries 19 238Key management personnel 24 1843 256

58Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 2008iii)Financing arrangements with related partiesAs at31 July 2008$ millionAs at31 May 2007Period end balances from financing arrangementsReceivables from subsidiaries 8,036 7,1388,036 7,138Payables to subsidiaries 6,278 5,1976,278 5,197$ million14 months to 12 months to31 July 2008 31 May 2007Interest income/(expense) from financingarrangementsInterest income from subsidiaries 438 360438 360Interest expense to subsidiaries (85) (50)(85) (50)All loans to related parties are unsecured and repayable in cash on demand.iv)Financial guaranteesThe Company together with other members of the Fonterra Group have provided financial guarantees for severalof Fonterra Group’s equity accounted investees. The aggregate amount of equity accounted investees liabilitiesfor which the Company and other members of the Fonterra Group are jointly and severally liable is $62 million (31May 2007: $66 million). The Company has provided financial guarantees for subsidiaries totalling $279 million(31 May 2007: nil).v) Co-operative share transactions with DirectorsNotes14 months to31 July 2008$ million12 months to31 May 2007Co-operative shares issued/(surrendered)Issued 35 11Surrendered (20) (3)Value Return payment to Directors 2 16As at31 July 2008$ millionAs at31 May 2007Period end balances outstandingPayable to Directors - 11

59Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 200820 Investment in subsidiariesAll subsidiaries are involved in marketing, distribution, processing, technology or financing dairy products.Investments in certain countries have some limited restrictions on the repatriation of funds back to the Company.This does not result in any significant restriction on the flow of funds for the Company.The significant subsidiaries of the Company are listed below:Ownership interests %As at31 July 2008As at31 May 2007Australasian Food Holdings Pty Limited Australia 100 100Canpac International Limited New Zealand 100 100Fencepost.com Limited New Zealand 100 100Fonterra (Brazil) Ltda Brazil 100 100Fonterra (China) Ltd Hong Kong 100 100Fonterra (Europe) GmbH Germany 100 100Fonterra (Italy) SpA Italy 100 100Fonterra (Japan) Ltd Japan 50 50Fonterra (Logistics) Ltd United Kingdom 100 100Fonterra (Mexico) S.A. de C.V. Mexico 100 100Fonterra (New Zealand) Limited New Zealand 100 100Fonterra (SEA) Pte Ltd Singapore 100 100Fonterra (USA) Inc USA 100 100Fonterra (Venezuela) S.A. Venezuela 100 100Fonterra Brands (Americas), Inc USA 100 100Fonterra Brands (Asia Holdings) Pte Ltd Singapore 100 100Fonterra Brands (Australia) Pty Ltd Australia 100 100Fonterra Brands (Malaysia) Sdn Bhd Malaysia 100 100Fonterra Brands (Mauritius) Ltd Mauritius 49 49Fonterra Brands (Middle East) L.L.C. UAE 49 49Fonterra Brands (New Young) Pte Ltd Singapore 51 51Fonterra Brands (New Zealand) Limited New Zealand 100 100Fonterra Brands (Singapore) Pte Ltd Singapore 100 100Fonterra Brands (Thailand) Ltd Thailand 100 100Fonterra Brands (Tip Top) Limited New Zealand 100 100Fonterra Brands Lanka (Private) Ltd Sri Lanka 100 100Fonterra Brands Limited New Zealand 100 100Fonterra Brands Phils. Inc. Philippines 100 100Fonterra Ingredients Australia Pty Ltd Australia 100 100Fonterra Limited New Zealand 100 100Kapiti Fine Foods Limited New Zealand 100 100New Zealand Dairy Board New Zealand 100 100New Zealand Milk (Australasia) Pty Limited Australia 100 100NZagbiz Limited New Zealand 100 100PT Fonterra Brands Indonesia Indonesia 100 100Saudi New Zealand Milk Products Company Ltd Saudi Arabia 49 49Soprole S.A. Chile 99.8 57Vialactia Biosciences (NZ) Limited New Zealand 100 100Whareroa Co-Generation Limited New Zealand 100 100Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to governthe financial and operating policies of the entity so as to obtain benefits from its activities.

60Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 200821 Subsequent eventsOn 12 December 2008, the Company announced an estimated Fair Value Share price for the 2009/2010 seasonof $4.47.In December 2008, the Company provided additional financial guarantees for a subsidiary for a maximum of $256million.There were no other material events subsequent to 31 July 2008 that would impact these financial statements.22 Explanation of transition to NZ IFRSReconciliation of NZ IFRS equity with Previous NZ GAAP at 31 May 2006$ million Equity Total Liabilities Total AssetsReported under previous NZ GAAP 5,017 9,226 14,243Investment in subsidiaries (1) - - -Fair value of land (2) 5 - 5Financial instruments (3) - 351 351Recognition of tax losses (4) 44 - 44Other adjustments (1) - (1)Total NZ IFRS adjustments 48 351 399Restated under NZ IFRS 5,065 9,577 14,642Reconciliation of NZ IFRS equity and profit with Previous NZ GAAP at and for the year ended 31 May 2007Profit/(loss) for$ million Equity Total Liabilities Total Assets the periodReported under previous NZ GAAP 4,880 10,798 15,678 (31)Investment in subsidiaries (1) (663) - (663) (663)Fair value of land (2) 5 - 5 -Financial instruments (3) - 394 394 -Recognition of tax losses (4) 53 - 53 9Value Return payment (5) - - - 488Other adjustments (10) - (10) (9)Total NZ IFRS adjustments (615) 394 (221) (175)Restated under NZ IFRS 4,265 11,192 15,457 (206)

61Fonterra Co-operative Group LimitedNotes to the Financial StatementsFor the 14 months ended 31 July 20081. Investment in subsidiariesNZ IFRS requires investments in subsidiaries in the separate financial statements of the investor to be recognisedeither at cost, or at fair value in accordance with NZ IAS 39. Under Previous NZ GAAP Fonterra recognised itsinvestments in subsidiaries at their net asset carrying values, with the annual change recognised in the incomestatement. NZ IFRS 1 provides an exemption to enable the investor to recognise investments in subsidiaries atdeemed cost on transition to NZ IFRS. One of the options available to use as the deemed cost is the PreviousNZ GAAP carrying amount on the date of transition. Accordingly Fonterra has established the deemed cost of itssubsidiaries on transition and reversed the net asset value uplift recognised during 2007, resulting in a reductionof profit for the year to 31 May 2007 of $663 million. The aggregate deemed cost of subsidiaries for whichdeemed cost was their Previous NZ GAAP carrying amount is $7,523 million.2. Fair value of landNZ IFRS 1 provides entities an exemption allowing the fair value of items of property, plant and equipment to beused as deemed cost on transition to NZ IFRS, without the requirement to revalue those items going forward.Fonterra has elected to apply this exemption to land on its balance sheet at the date of transition. The effect ofthis is to increase property, plant and equipment at 31 May 2007 by $5 million (31 May 2006: $5 million). Theaggregate fair value of land at 31 May 2007 for which fair value is used as deemed cost on transition to NZ IFRSis $6 million (31 May 2006: $6 million).3. Financial instrumentsNZ IAS 39 requires all derivative instruments to be recorded at fair value in the balance sheet with the relatedchanges in fair value recognised in the income statement. Fonterra applies hedge accounting in the Company’sfinancial statements for certain debt instruments. Fonterra has a deed of novation in respect of all foreignexchange gains and losses arising on derivative financial instruments, to transfer such gains and lossesrecognised in the income statement to another entity within the Fonterra Group. Therefore, on transition to NZIFRS Fonterra has recognised all derivative instruments at their fair values in the balance sheet, with an offsettingentry to intercompany payables and receivables. This entry has no overall impact on equity.4. Recognition of tax lossesFonterra has recognised additional New Zealand tax losses because of the recognition of deferred tax liabilitieson other NZ IFRS adjustments. The effect of recognising tax losses at 31 May 2007 was to decrease thedeferred tax liability by $53 million (31 May 2006: $44 million), and increase profit for the year to 31 May 2007 by$9 million.5. Value Return paymentNZ IAS 32 contains specific guidelines on distinguishing whether payments made to shareholders are in theircapacity as shareholders or in their capacity as suppliers. Accordingly the Value Return payment is shown as adeduction from equity rather than profit. The impact is to increase profit for the year to 31 May 2007 by $488million (being the Value Return payout of $728 million less the tax credit of $240 million). This has no overallimpact on equity.6. SoftwareSoftware, to the extent it is not an integral part of the related hardware, has been reclassified from property, plantand equipment to intangible assets. The total amount of the reclassification at 31 May 2007 is $43 million (31May 2006: $34 million). The amortisation expense has also been reclassified from depreciation to amortisation.The total amount reclassified within the income statement for the twelve months ended 31 May 2007 is $11million. This adjustment has no overall impact on equity.

62AUDITORS’ REPORTThe DirectorsFonterra Co-operative Group LimitedPrivate Bag 92032Auckland 114229 January 2009Auditors’ report for inclusion in the ProspectusDear DirectorsAs auditors of Fonterra Co-operative Group Limited (“the Company” and “the Borrowing Group”) wehave prepared this report pursuant to clause 36 of the Second Schedule of the Securities Regulations1983 for inclusion in a Prospectus to be dated 30 January 2009.Directors’ responsibilitiesThe Directors are responsible for the preparation and presentation of:(a)(b)(c)the financial statements which give a true and fair view of the state of affairs of theBorrowing Group as at 31 July 2008 and its financial performance and cash flows for theperiod ended on that date, as required by clauses 16 to 32 of the Second Schedule of theSecurities Regulations 1983;the summary of financial statements of the Borrowing Group for the period ended31 July 2008 and the years ended 31 May 2007, 2006, 2005 and 2004 as required byclauses 7(2) and 7(3) of the Second Schedule of the Securities Regulations 1983; andthe amounts in respect of the ranking of securities of the Borrowing Group as at31 July 2008 as required by clause 12 of the Second Schedule of the SecuritiesRegulations 1983.Auditors’ responsibilitiesWe are responsible for expressing an independent opinion on the financial statements of theBorrowing Group for the period ended 31 July 2008 presented by the Directors and reporting ouropinion in accordance with clause 36(1) of the Second Schedule of the Securities Regulations 1983.

63Fonterra Co-operative Group Limited29 January 2009We are also responsible for reporting, in accordance with clause 36(1)(g) of the Second Schedule ofthe Securities Regulations 1983, on the following matters which have been prepared and presented bythe Directors:(a)(b)the amounts included in the summary of financial statements of the Borrowing Group forthe period ended 31 July 2008 and the years ended 31 May 2007, 2006, 2005 and 2004;andthe amounts in respect of the ranking of securities for the Borrowing Group on page 13 asat 31 July 2008.We carry out other assignments on behalf of the Company in the areas of taxation compliance,transaction services, financial assurance, and international accounting standard advisory services.Partners and employees of our firm may deal with the Company on normal terms within the ordinarycourse of trading activities of the Company. The firm has no other relationship with, or interest in, theCompany.Basis of opinion on the financial statementsAn audit on the financial statements includes examining, on a test basis, evidence relevant to theamounts and disclosures in the financial statements. It also includes assessing:(a)(b)the significant estimates and judgments made by the Directors in the preparation of thefinancial statements; andwhether the accounting policies used and described on pages 33 to 38 are appropriate tothe circumstances of the Borrowing Group, consistently applied and adequately disclosed.We have conducted our audit in accordance with generally accepted auditing standards inNew Zealand. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us with sufficient evidence to givereasonable assurance that the financial statements are free from material misstatements, whethercaused by fraud or error. In forming our opinion we also evaluated the overall adequacy of thepresentation of the information in the financial statements.Basis of opinion on the summary of financial statements and the ranking of securitiesWe have undertaken procedures to provide reasonable assurance that:(a)(b)the amounts set out in the summary of financial statements of the Borrowing Group onpage 28, pursuant to clauses 7(2) and 7(3) of the Second Schedule of the SecuritiesRegulations 1983, have been correctly taken from the audited financial statements of theCompany for the period ended 31 July 2008 and the years ended 31 May 2007, 2006,2005 and 2004; andthe amounts in respect of the ranking of securities on page 13, pursuant to clause 12 ofthe Second Schedule of the Securities Regulations 1983, have been correctly taken fromthe audited financial statements of the Company for the period ended 31 July 2008.

64Fonterra Co-operative Group Limited29 January 2009Unqualified opinion on the financial statements, the summary of financial statements and theranking of securitiesWe have obtained all the information and explanations we have required.In our opinion:(a)(b)proper accounting records have been kept by the Company as far as appears from ourexamination of those records;the financial statements of the Borrowing Group, on pages 29 to 61 of this Prospectus, asrequired by clauses 16 to 32 of the Second Schedule of the Securities Regulations 1983,and that are required to be audited:(i)(ii)(iii)comply with the Regulations;subject to those Regulations, comply with generally accepted accounting practicein New Zealand; andgive a true and fair view of the state of affairs of the Borrowing Group as at31 July 2008 and its financial performance and cash flows for the period ended onthat date(c)(d)the amounts or details set out in the summary of financial statements, on page 28 of thisProspectus, as required by clauses 7(2) and 7(3) of the Second Schedule of theSecurities Regulations 1983, have been correctly taken from the audited financialstatements of the Company for the period ended 31 July 2008 and the years ended31 May 2007, 2006, 2005 and 2004 from which they were extracted;the amounts or details as set out in ranking of securities of page 13 of this Prospectus, asrequired by clause 12 of the Second Schedule of the Securities Regulations 1983, havebeen correctly taken from the audited financial statements of the Company, from whichthey were extracted.Yours faithfullyChartered AccountantsAuckland

65FONTERRA GROUP SUMMARY FINANCIAL INFORMATIONThis summary of financial information for Fonterra Co-operative Group Limited and its subsidiaries (the “FonterraGroup”) has been provided as additional information.NZ IFRS/NZ GAAPNZ IFRS/NZ GAAPPreviousNZ GAAPPreviousNZ GAAPPreviousNZ GAAPPreviousNZ GAAP31/7/2008 31/5/2007 31/5/2007 31/5/2006 31/5/2005 31/5/200414 months 12 months 12 months 12 months 12 months 12 months$ million $ million $ million $ million $ million $ millionRevenue 19,512 13,687 13,882 13,001 12,323 11,830Cost of goods sold (16,820) (10,853) (10,943) (10,511) (9,640) (9,183)Cost of goods sold – Value Return - - (728) (300) (522) (576)Gross profit 2,692 2,834 2,211 2,190 2,161 2,071Net operating expenses (2,094) (1,616) (1,715) (1,774) (1,648) (1,779)Finance income 76 24Finance expense (443) (358) (398) (364) (269) (250)Share of profit/ (loss)of equity accounted investees 158 73Impairment of equity accounted investees (142) (25)Profit/ (loss) before tax 247 932 98 52 244 42Tax credit/ (expense) 47 (279) (67) (40) (25) (26)Profit/ (loss) after tax 294 653 31 12 219 16Total assets 14,439 13,494 12,631 13,080 11,812 11,112Total liabilities (10,170) (8,516) (7,615) (7,935) (6,901) (6,317)Equity (4,269) (4,978) (5,016) (5,145) (4,911) (4,795)No information has been provided in respect of dividends and dividends per share information as Fonterra Group does not pay ‘dividends’.The summary financial information presented above has been extracted or derived from audited financial statements.On 1 June 2007 the Fonterra Group adopted New Zealand equivalents to International Financial Reporting Standards(“NZ GAAP“ or “NZ IFRS”). The financial information for the years ended 31 May 2004 to 31 May 2006 has beenprepared under previous New Zealand Financial Reporting Standards (“Previous NZ GAAP”). The financial informationfor the year ended 31 May 2007 and the 14 month period ended 31 July 2008 has been prepared under NZ IFRS. Thefinancial information for the year ended 31 May 2007 has also been reported under Previous NZ GAAP. Note 26 of theFonterra Group financial statements (which may be obtained from www.fonterra.com) explains the main differencesbetween the Previous NZ GAAP and NZ IFRS.During the periods to which the information above relate, there have been no extraordinary items or material changes inthe activities of the Fonterra Group. Except for the transition from Previous NZ GAAP to NZ IFRS, there have been nomaterial changes in accounting policies. The following items, by their incidence or size, impacted the performance of theFonterra Group:2008 • Fonterra Group changed its balance date from 31 May to 31 July. The results for 31 July are for a 14month period, while prior periods are for a 12 month period and are therefore not directly comparable.• Higher revenues were achieved as a result of the significant increase in commodity prices. The increasein commodity prices resulted in a significantly higher Milk Price, and therefore cost of goods sold. Thehigher Milk Price also increased receivables and borrowings.• Included within the impairment of equity accounted investees is a $139m write-down of the investment inShijiazhuang San Lu Group Company Limited (“San Lu”).• Key classification differences from Previous NZ GAAP to NZ IFRS that can be seen in this summary offinancial information are:• Previous NZ GAAP classified finance income and amounts in relation to equity accounted investeesin revenue.• Previous NZ GAAP classified Value Return in cost of goods sold. Value Return is now recogniseddirectly in equity.• Previous NZ GAAP classified the tax credit arising on Value Return paid to shareholders in the taxcredit. This is now recognised, with the Value Return, directly in equity.2007 • The key differences between Previous NZ GAAP and NZ IFRS discussed for 2008 are also relevant for2007.• The transition from Previous NZ GAAP to NZ IFRS resulted in an adjustment to the value of financialinstruments, and other adjustments. The overall increase in the net surplus (excluding the value returnadjustment) was $134m.2006 • Fonterra Group acquired the business of New Zealand Dairy Foods and sold its 100% investment inMainland Products Limited. This resulted in an increase in net assets (including goodwill) of $413m and again of $51m.2005 • Fonterra Group sold its investment in National Foods resulting in a gain of $195m.2004 • Fonterra Group acquired an additional 25% of Bonlac Foods Ltd, to take a controlling total ownershipinterest to 50%. The transaction also incorporated the purchase of the remaining 75% of NZMP(Australia) Pty Ltd. This transaction resulted in an increase in the net surplus of $21m, total assets of$586m, and total liabilities of $390m.

66GLOSSARYIn this Prospectus, unless the context otherwise requires:Application means an application for Bonds pursuant to this Offer;Application Form means the application form attached to this Prospectus;Bonds means the fixed rate notes to be issued by Fonterra pursuant to this Prospectus and the InvestmentStatement;Business Day means any day on which banks are open for the transaction of general banking business inAuckland and Wellington;Closing Date means 6 March 2009, or such other date determined by Fonterra as set out under the headingAlteration of dates on page 4 of this Prospectus;Co-Managers means ABN AMRO Craigs Limited and First NZ Capital Securities Limited;Companies Act means the Companies Act 1993;Constitution means Fonterra’s constitution as it may be amended from time to time;Directors means the members of the board of directors of Fonterra, and Director means any one of them;DIRA means the Dairy Industry Restructuring Act 2001;Event of Default has the meaning given to it in the Trust Documents;Fonterra or the Issuer or the Company means Fonterra Co-operative Group Limited;Fonterra Group means Fonterra and its Subsidiaries;Holder means a person entered in the Register as a holder of Bonds;Interest Payment Date means, in relation to a Bond, 10 March, 10 June, 10 September and 10 December, orsuch other dates determined by Fonterra as set out under the heading Alteration of dates on page 4 of thisProspectus and recorded as such in the Register in respect of the Bonds, in each year up to and including theMaturity Date;Interest Rate means, in relation to a Bond offered under this Prospectus, the rate of interest per annum payableon the face value of the Bond as set by Fonterra in consultation with the Joint Lead Managers on the InterestRate Set Date;Interest Rate Set Date means 9 March 2009, or such other date determined by Fonterra as set out under theheading Alteration of dates on page 4 of this Prospectus;Investment Statement means the investment statement for the Bonds;Issue Date means 10 March 2009, or such other date determined by Fonterra as set out under the headingAlteration of dates on page 4 of this Prospectus and recorded as such in the Register in respect of the Bonds;Joint Lead Managers means ANZ, a part of ANZ National Bank Limited and BNZ Capital, a division of Bank ofNew Zealand;Master Trust Deed means the master trust deed between Fonterra and the Trustee dated 18 November 2002;Maturity Date means 10 March 2015, or such other date determined by Fonterra as set out under the headingAlteration of dates on page 4 of this Prospectus and recorded as such in the Register in respect of the Bonds;NZDB means the New Zealand Dairy Board;NZDX means the New Zealand Debt Exchange, a market operated by NZX;NZX means NZX Limited;NZX Firm means a sharebroking firm authorised to trade shares on NZX;Offer means the offer of the Bonds under this Prospectus and the Investment Statement;Organising Participant means BNZ Capital, a division of Bank of New Zealand;Principal Amount means $1.00 per Bond;Prospectus means this prospectus for the Bonds dated 30 January 2009;Record Date means, in relation to any applicable interest payment, 5.00 pm on the day which is 10 days prior tothe due date for payment (or, if that day is not a Business Day, the immediately preceding Business Day);Register means any register of Bonds maintained by the Registrar;

67Registrar means Computershare Investor Services Limited;Securities Act means the Securities Act 1978;Securities Regulations means the Securities Regulations 1983;Six-Year Swap Rate means the rate determined by the Joint Lead Managers from the straight line interpolation(rounded, if necessary, to the nearest two decimal places) between the mid rates displayed at or about 11am onthe Interest Rate Set Date on the Reuters page FISSWAP (or its successor page) for an interest rate swap with aterm approximately equal to five years and an interest rate swap with a term approximately equal to seven years(adjusted as necessary for quarterly payments);Subscription Moneys means, in respect of a Holder, the moneys payable by that Holder in respect of subscriptionfor the Bonds held by that Holder;Subsidiary means, in relation to Fonterra:(a)(b)a subsidiary within the meaning of section 5 of the Companies Act 1993 (or any other person which wouldbe a subsidiary of that person if that person and the other person were both registered under theCompanies Act 1993); ora “subsidiary” in accordance with generally accepted accounting practice in New Zealand as defined insection 3 of the Financial Reporting Act 1993,of Fonterra, and Subsidiaries has a corresponding meaning;Supplemental Trust Deed means the supplemental trust deed (No. 10) between Fonterra and the Trustee dated29 January 2009;Trust Documents means the Master Trust Deed and the Supplemental Trust Deed; andTrustee means The New Zealand Guardian Trust Company Limited.

68DIRECTORYIssuerFonterra Co-operative Group Limited9 Princes StreetAucklandPrivate Bag 92032Auckland 1142TrusteeThe New Zealand Guardian Trust Company LimitedLevel 7, Vero Centre48 Shortland StreetAucklandPO Box 1934Auckland 1140Joint Lead ManagerANZ, a part of ANZ National Bank LimitedLevel 7, 1 Victoria StreetWellingtonPO Box 540Wellington 6011Phone: 0800 269 476Joint Lead Manager and Organising ParticipantBNZ Capital, a division of Bank of New ZealandBNZ Tower, Level 6125 Queen StreetAucklandPhone: 09 976 5439Legal advisers to the IssuerMayne WetherellLevel 23, IAG House151 Queen StreetAucklandPO Box 3797Auckland 1140Legal advisers to the TrusteeBell GullyLevel 22, Vero Centre48 Shortland StreetAucklandPO Box 4199Auckland 1010Co-ManagersABN AMRO Craigs LimitedABN AMRO Craigs House, 158 Cameron RoadPO Box 13155Tauranga 3141Phone: 0508 226 226First NZ Capital Securities LimitedLevel 10, Fujitsu Tower282 - 292 Lambton QuayPO Box 3394WellingtonPhone: 0800 005 678AuditorsPricewaterhouseCoopers188 Quay StreetAucklandPrivate Bag 92162Auckland 1142RegistrarComputershare Investor Services Limited159 Hurstmere RoadTakapunaPrivate Bag 92119Auckland 1142

69APPLICATION INSTRUCTIONS1. Complete details.• Insert your title, full name(s), address andtelephone numbers.• Applications must be in the name(s) of naturalpersons, companies or other legal entities.• Applications by a minor, trust, fund, estate,business, firm or partnership, club or otherunincorporated body cannot be accepted unlessthey are made in the individual name(s) of theperson(s) who is (are) the legal guardian(s),trustee(s), proprietor(s), partner(s), or officebearer(s) (as appropriate).• Insert your IRD Number if you have one.• Tick the relevant box for Resident Withholding Tax(if applicable). Complete country of tax residenceand, if that is not New Zealand, tick the box if youcarry on business in New Zealand through a fixedestablishment (branch) in New Zealand.• An Application for Bonds must be for a minimumaggregate Principal Amount of $5,000 and inmultiplies of $1,000 thereafter.• Insert the New Zealand dollar bank account intowhich you wish interest payments to be deposited.2. Signing• Read the Application Form carefully and sign (anddate) the form.• The form must be signed by the applicant(s)personally, or by two directors of the company (orone director if there is only one director), or (ineither case) by an attorney.• If the Application Form is signed by an attorney, anoriginal or certified copy of the relevant Power ofAttorney must be lodged with the Application Form(originals will be returned). The attorney mustcomplete the certificate of non-revocation below.• If the Application Form is signed by an agent, theagent must complete the certificate of nonrevocationbelow.• Joint applicants must each sign the ApplicationForm.3. Payment• Payment of the total Subscription Moneys in fullmust accompany the Application Form.• Payment must be made in New Zealand dollars forimmediate value, with a cheque drawn on a NewZealand bank.• Where an Application is for Bonds with a PrincipalAmount of $500,000 or more, payment must bemade by bank cheque or any other method ofpayment acceptable to Fonterra.• Cheques must be made out in favour of "FonterraBond Offer”, and crossed "Not Transferable".4. Offer Opening and Closing• Offer opens 9 February 2009 (or any earlier timeannounced by Fonterra).• Offer closes 6 March 2009 (or any other timeannounced by Fonterra).5. Delivery• Applications cannot be revoked or withdrawn.• Application Forms together with cheques may bemailed or delivered to the Registrar so as to bereceived by no later then 5.00pm New Zealand timeon the Closing Date at:Computershare Investor Services LimitedPostal address:Private Bag 92119AucklandORPhysical address:Level 2159 Hurtsmere RoadTakapunaNorth Shore City• Applications may also be submitted to any JointLead Manager, Co-Manager, NZX primary marketparticipant, the Organising Participant or any otherchannel approved by NZX in time to enable theApplication to be forwarded to the Registrar at theaddress above and to be received by the timenoted above.• Applicants should remember that the Offer periodmay be changed at the sole discretion of Fonterra.• Fonterra may accept or reject any Applicationwithout giving any reason. Fonterra will refuse toaccept Applications which are for less than theminimum amount.

70APPLICATION FORMFonterra Co-operative Group Limited (“Fonterra” or “Issuer”)This Application Form is issued with the Investment Statement prepared as at 30 January 2009, issued byFonterra.Please complete this Application Form and return it together with your cheque to the Registrar (ComputershareInvestor Services Limited) or to the Joint Lead Managers, the Co-Managers, any NZX primary marketparticipant, the Organising Participant or any other channel approved by NZX in time for it to be forwarded to theRegistrar before 5.00pm on the Closing Date (currently 6 March 2009).1. APPLICANT(S) TO COMPLETE, BLOCK LETTERS PLEASEPlease enter name(s) in full (including all first names)Title Legal First Name(s) Legal Family NameBroker’s stampAdviser’s codeIRD Number:Corporate NameTax, please deduct from all my interest paid* (tick one)19.5% Resident Withholding Tax 33% Resident Withholding Tax 39% Resident Withholding Tax Exempt(*If exempt from Resident Withholding Tax please attach a copy of Certificate of Exemption)Country of tax residence: _________________________________________Although not a New Zealand tax resident, I am engaged in business in New Zealand through a fixed establishment (branch) in NewZealandPostal address (including post code): Home ph: ( )2. APPLICATION – IMPORTANTWork ph: ( )Fax no: ( )Email:• Cheques must be made payable to “Fonterra Bond Offer” and crossed “Not Transferable”.• Fonterra may accept or reject all or part of this Application without giving any reason.• The minimum investment amount per Application is $5,000 and in multiples of $1,000 thereafter.Principal Amount of Bonds applied for:Method of payment – tick one:Cheque attached for: $$Payment through the Austraclear System (institutional investors only)Austraclear NZ Mnemonic (for settlement)(if applicable) (To be settled with theRegistrar (CISL90)):3. PAYMENT INSTRUCTION OPTIONS (please complete only one option)Option 1: Payment to my nominated New Zealand bank. My nominated bank account is:Account Name(s):Account Number:Bank Branch Account Number SuffixThe account nominated above will be used for all payments of interest and the Principal Amount when they become payable.Option 2: Payment to my Cash Management Account with my broker:Name of broker where Cash Management Account held:Cash Management Client Account Number:4. COMPUTERSHARE INVESTOR SERVICES LIMITED SHAREHOLDER NUMBER OR CSNIf you currently have a Computershare Shareholder Number or CSN please insert it here:5. INFORMATIONThe information in this Application Form is provided to enable the Issuer, its related companies and the Registrar to process your Application, and administeryour investment. By signing this Application Form you authorise the Issuer to disclose information to its related companies, and for the Issuer, its relatedcompanies and the Registrar to disclose information in situations where the Issuer or any of its related companies, or the Registrar are required or permitted todo so by any applicable law or by a governmental, judicial or regulatory entity or authority in any jurisdiction. If you are an individual, under the Privacy Act1993, you have the right to access and correct any of your personal information.6. INDEMNITYThe Investment Statement only constitutes an offer of Bonds to the public in New Zealand and to investors in other jurisdictions where the Bonds may belawfully offered. No action has been or will be taken by the Issuer which would permit an offer of Bonds to the public, or possession or distribution of anyoffering material, in any country or jurisdiction where action for that purpose is required (other than New Zealand). Bonds may only be offered for sale or soldin conformity with all applicable laws and regulations in any jurisdiction in which they are offered, sold or delivered.No Holder, or any other person, may purchase, offer, sell, distribute or deliver Bonds, or have in its possession, publish, deliver or distribute to any person, anyoffering material or any documents in connection with the Bonds, in any jurisdiction other than in compliance with all applicable laws and regulations.By applying for Bonds, each applicant indemnifies the Issuer, each Joint Lead Manager, each Co-Manager and the Trustee and each of their respectivedirectors, officers and employees for any loss or liability sustained or incurred by the Issuer, that Joint Lead Manager, that Co-Manager or the Trustee, as thecase may be, as a result of the breach by that applicant of the above selling restrictions.

717. SIGNATURE(S) OF APPLICANT(S)I/We hereby apply for the Bonds as set out above. I/We agree to accept the investments as applied for or any lesser amount that may be issued to me/us.I/We agree to be bound by the terms of the Bonds, the Trust Documents and by the provisions of the Investment Statement dated 30 January 2009.I/We certify that, where information is provided by me/us in this form about another person, I am/we are authorised by such person to disclose the informationto you and give authorisation.In the case of joint Applications, the joint applicants agree that, unless otherwise expressly indicated in this Application Form, the Bonds will be held jointly asjoint tenants. I/We have taken this Application Form from the Investment Statement, which I/we have read.Please read all of this Application Form before signing.Signature of Applicant:Signature of Applicant:Date:Date:Signature of Applicant:CERTIFICATE OF NON-REVOCATION OF POWER OF ATTORNEYComplete this section if you are an individual acting on behalf of someone for whom you hold Power of Attorney.I, (Full name of attorney)ofDate:(Place and country of residence of attorney)(Occupation of attorney)CERTIFY1. That by deed dated (DD/MM/YYYY)ofappointed me his/her/its power of attorney.2. That I have not received notice of any event revoking the power of attorney.3. (If the donor is a body corporate) That to the best of my knowledge and belief no such notice has beenreceived byor by any employee or agent of that body corporate.Signed at:Signature of Attorney:(Full name of donor of power of attorney)(Place and country of residence of donor):(Full name of body corporate holding powerof attorney).Dated (DD/MM/YYYY):Complete this section if you are a body corporate acting on behalf of someone for whom you hold Power of Attorney.I, (Full name of attorney)of(Place and country of residence of attorney)(Occupation of attorney)CERTIFY1. That by deed dated (DD/MM/YYYY)(Full name of donor of power of attorney)of(Place and country of registered office orprincipal place of business of donor)appointed as attorney(Full name of body corporate holding powerof attorney)a body corporate having its registered office (or principal place of business) at(Address of registered office or principalplace of business)and I am authorised to give this certificate on its behalf. The capacity in which I give this certificate for the (Director, officer or other capacity)attorney is as2. That I have not received notice of any event revoking the power of attorney.3. (If the donor is a body corporate) That to the best of my knowledge and belief no such notice has beenreceived byor by any employee or agent of that body corporate.Signed at:Signature:(Full name of body corporate holding powerof attorney).Dated (DD/MM/YYYY):CERTIFICATE OF NON-REVOCATION OF AGENTComplete this section if you are acting as agent for someoneI, (Name of Agent)of(Address of Agent)(Occupation of Agent)CERTIFY1. That, by the Agency Agreement dated: (DD/MM/YYYY)appointed me his/her/its Agent on the terms and conditions set out in the (Name of Donor)Agency Agreement.2. That I have executed the Application for Bonds printed on this Application Form under the appointment and pursuant to the powers thereby conferred onme.3. That I have not received any notice of any event revoking the appointment by death (or winding up) of the Donor or otherwise.Signed at:Dated (DD/MM/YYYY):Signature of Agent: