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Barry Harris | 16 March 2007

The Milk Run

The Foundation of Fonterra’s Global Dairy Supply Chain

The Milk Run: Today’s Presentation

Who is Fonterra?

Moving milk – a global perspective

The origin of our supply chain:

– The 14 000 million litre challenge

– Technology and innovation

Conclusion

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Fonterra - An Overview

One of the top six dairy companies in the world

Owned by more than 11 000 New Zealand farmers

Each supplying farm has an average area of 112 ha and an average herd size of 318 dairy cows.

In 2005/06 our suppliers produced an average of 99 000 kg milk solids per farm (1,165,000L)

Fonterra - An Overview

We have assets of over US$ 8 900 million generating sales of US$ 8 900 million for 2005/06

Each year we:

– collect 14 000 million litres of milk - 96 per cent of New Zealand’s milk production

– ship two million tonnes of product out of New Zealand

– export to more than 140 markets

– generate more than 20 per cent of New Zealand’s annual export earnings

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Fonterra – Our Brands

Fonterra’s Involvement in Global Sources of Milk Supply

JV

DPA (2 000 million litres)

Dairy Farmers America

Marketing agreement

Millions of Litres of Milk

Fonterra Australia (2 000 million litres)

Britannia

San Lu and subsidiaries (1 000 million litres)

Soprole(400 million litres)

Brands Operating Companies

NZM Sri Lanka

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Source: BERLIN, FAO, Euromonitor

SummarySummary

Change in Liquid Milk Equivalent (LME) consumption

2004-2014 (million tonnes)

Forecast CAGR 2004-2014

< 0%0% - 2.5%2.5% - 5.0%> 5.0%

2005 – 2014 Global Dairy Consumption Forecast(2.7% CAGR generating 147 million tonnes LME of new consumption)

LATAM +14

AME +14CN +52

EU +5

CIS/FSU +6

Trends In Demand

Note: Milk consumption includes cow milk only (excludes buffalo & goat)

CA/US +7

PK/IN +22

Growth in dairy consumption is expected to be strong in Latin America, North Africa/Middle East & Asia

Africa +11

EU +0

Higher farm-gate prices drive growth in milk production, with annual growth forecast to increase from 8m tonnes 1996-2004 to 13m in 2005-2014. This is achieved by:- 43m more cows (number of farms to increase by 14m to 120m)- 9% increase in milk yield per cow

Forecast CAGR 2004-2014

< 0%0% - 2.5%2.5% - 5.0%> 5.0%

CIS/FSU +22

LATAM +17

CN +20?CA/US +6

PK/IN +23

2005 – 2014 Global Dairy Production Forecast*(2.0% CAGR generating 116 million tonnes ECM of new production)

Trends In Supply SummarySummary

Change in Liquid Milk Equivalent (LME) consumption

2004-2014 (million tonnes)

Source: IFCN (contracted to BERLIN)Note: Milk consumption includes cow milk only (excludes buffalo & goat)

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Dairying in New Zealand

Pasture-based farming system

Aim to have all cows milking when grass is growing at its fastest and have the cows eating high-quality pasture.

This requires:

– all cows calving at the right time

– silage harvesting

New Zealand Milk Supply

New Zealand Milk Curve

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1/06

/200

6

1/07

/200

6

1/08

/200

6

1/09

/200

6

1/10

/200

6

1/11

/200

6

1/12

/200

6

1/01

/200

7

1/02

/200

7

1/03

/200

7

1/04

/200

7

1/05

/200

7

Volu

me

(000

L)

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Transportation in Fonterra

Every day we need to:

– Collect milk off-farm

– Deliver milk to our factories

– Transport liquid by-product between factories

– Transport dairy products and ingredients around New Zealand

– Ship dairy products and ingredients around the world

Milk Collection – The Challenges

Milk collection is one of the most difficult transport logistics problems in the world, due to:

1. The scale

– Amount of milk collected

– Number of pick-ups and deliveries

– Location of farms and factories

2. The unpredictability

– Can only estimate volumes in advance

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Milk Collection – The Challenges

Geographical issues

Weather

Shelf life

Specialty milk collections

Access restrictions

Inter-site transfers

Available time windows to pick up and deliver raw milk and milk by-products

Farm Milking Profile

Act per Day

0

1000

2000

3000

4000

5000

6000

7000

8000

28/0

7/20

02

11/0

8/20

02

25/0

8/20

02

8/09

/200

2

22/0

9/20

02

6/10

/200

2

20/1

0/20

02

3/11

/200

2

17/1

1/20

02

1/12

/200

2

15/1

2/20

02

29/1

2/20

02

12/0

1/20

03

26/0

1/20

03

9/02

/200

3

23/0

2/20

03

9/03

/200

3

23/0

3/20

03

6/04

/200

3

20/0

4/20

03

4/05

/200

3

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Forecasting Milk Collection Volumes

1 2 3 4 5

4000

4600

5400

4500

a?

b?

c?d?

e?

f?

g?

Farm #15 Mar 2003

Farm #16 Oct 2002

Farm #13 Jan 2003

Farm #25 Sep 2002

Farm #5 Mar 2003

Farm #13 Aug 2002

Farm #30 Aug 2002

The Scheduling Challenge

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The Scheduling Challenge

How do we solve the problem, so that we collect milk as efficiently as possible while, maintaining our service to suppliers, factories and external clients?

Fonterra’s Answer

Improved prediction and volume forecasting tools

– Also enables planning to begin up to a week ahead

Developing and adopting enabling systems with our partners

– Universities for research

– Specialist systems on tankers - hardware and software, enabling improved communication technologies

– Integrated scheduling and dispatch systems, enables future planning as well as dynamic optimisation on the day

Growing our people

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Milk Collection Programme Of Work

Standardised equipment on alltankers

– Incorporates radio frequency identification (RFID) technology

– The latest development in mobile metering and sampling technologies

Every Fonterra vat:

– has the same75mm (three - inch) bayonet connection

– has a RFID tag

Milk Collection Programme Of Work

Improved in-cab solution

– Uses mobile phone technology

– Determines the most efficient and safest route

Dynamic and integrated scheduling and dispatch system

Delivers real benefits

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Milk Vat Management System (MVMS)

We are piloting new technology that:

Remotely measures the volume and temperature of the milk in farm vats

Automatically relays the information to Fonterra

Will allow us to schedule our tankers more efficiently

May also have on-farm benefits

Summary – The Milk Run

Fonterra is a major player in global dairy trade – 32% of worldwide export trade, 2.5 million MT, 140 countries

Global dairy trade and consumption is growing 2.7% CAGR

Multi-origin sourcing of milk, but NZ remains the core of production –14 billion litres of milk/yr

Pastoral, seasonal production: 11,000 farmer suppliers, 70 processing plants – many variables

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Summary – The Milk Run

Challenges– Perishable product– Weather/seasonal production– Geography– Product mix/manufacturing requirements

More than 100 years of innovation and continuous improvement in milk collection in NZ

Latest advances in more accurate forecasting/increasing automation of scheduling and despatch (RFID, cellular technology)

Research + People + Technology

The Milk Run will be an ongoing challenge – to balance efficiency with service to our suppliers

The Milk Run will be an ongoing challenge – to balance efficiency with service to our suppliers

Thank you