SUBMISSION TO THE AUSTRALIAN COMPETITION TRIBUNAL RE APPLICATION BY MURRAY

GOULBURN COOPERATIVE CO. LIMITED (“Murray Goulburn”) TO ACQUIRE SHARES IN THE

CAPITAL OF WARNAMBOOL CHEESE AND BUTTER FACTORY COMPANY HOLDINGS LIMITED

(“WCB”) (“Application”)

1. SUBMITTER

1.1. Fonterra Cooperative Group Limited, 9 Princes Street, Auckland, New Zealand “Fonterra”

together with its wholly owned subsidiaries, Fonterra Brands (Australia) Pty Limited, 327

Ferntree Gully Road, Mt Waverley, Melbourne, VIC and Fonterra Ingredients Australia Pty

Limited, Ferntree Gully Road, Mt Waverley, Melbourne, VIC, together “Fonterra Australia”.

2. OVERVIEW OF SUBMITTER

2.1. Fonterra is a cooperative company registered under the Cooperative Companies Act 1996 in

New Zealand. Fonterra is owned by its 10,700 farmer suppliers.

2.2. Fonterra is the world’s number one milk processor processing more than 21 billion litres of

milk globally per year. Around two thirds of that milk is produced by its owners in New

Zealand, the remainder comes from farmer suppliers and other milk processors around the

globe. Fonterra supplies products to more than 100 markets around the world and owns

leading dairy brands in Australia / New Zealand, Asia, the Middle East and Latin America. It

employs 17,300 staff globally and in the 2013 financial year generated revenues of NZ$18.6

billion.

2.3. Fonterra Australia is a core part of Fonterra’s global operation. Fonterra Australia has

approximately 1300 farmer suppliers in Australia which supply Fonterra directly and via the

Bonlac Supply Company. It processes approximately 1.6 billion litres of milk each year in

Australia. Fonterra Australia is one of Australia’s largest consumer dairy businesses, owning

and licensing leading dairy brands including Western Star, Perfect Italiano, Bega, Ski,

Riverina Fresh and Mainland. It employs around 2000 people.

3. OVERVIEW OF SUBMISSION

3.1. Fonterra is committed to the long term success of the Australian Dairy Industry and the

dairy farmers that are at its core. Fonterra is reliant on, and invested in, the sustainability

and future growth of the Australian milk pool and it is supportive of any proposal that will

promote these outcomes.

3.2. Fonterra, Fonterra Australia and the New Zealand Dairy Industry’s experience have been

referenced throughout Murray Goulburn’s application in support of its merger proposal.

3.3. Fonterra’s purpose in making this submission is to provide its view on the matters raised in

the application that relate to it and dairy processing in general in order to ensure that the

Tribunal has accurate and balanced information on which to base its assessment of the

likely benefits and detriments of the Murray Goulburn merger proposal.

3.4. The first part of our submission elaborates on some key aspects of the Fonterra merger

experience that have not been addressed in the Application and discusses its relevance to

the Murray Goulburn proposal.

3.5. The second part addresses specific comments contained within the Application.

4. SUBMISSION

PART 1: The Fonterra Merger Experience

4.1. We note the evidence of Mr Craig Norgate and offer the following additional observations.

4.2. The Tribunal should exercise caution in applying the Fonterra merger experience to the

Murray Goulburn proposal and in using it to draw any conclusions about the benefits that

may flow from a Murray Goulburn / WCB merger. There are two reasons for this:

4.2.1. The Fonterra merger was different both in nature and scale from the merger under

consideration by the Tribunal and the benefits that are likely to arise from the Murray

Goulburn proposal are also likely to be different.

4.2.2. The Fonterra merger was underpinned by a series of voluntary and regulatory

behavioural constraints. These constraints have been pivotal in ensuring that

competition for milk at the farmgate was preserved, which is in turn key to the

continued promotion of growth within any dairy industry.

4.3. We expand on these points below.

Rationale for merger

4.4. The primary motivation for the Fonterra merger was to achieve better vertical integration

between the collection, processing and marketing of New Zealand dairy product.

4.5. Economies of scale had already largely been met and the pre-requisites necessary to take

advantage of scale benefits were already in place (wide-reaching well established sales

network, significant R&D capability, customer relationships, diverse manufacturing

footprint). However, the structure of the industry, with the New Zealand Dairy Board and

two large co-operatives together accounting for around 95% of production and sales, was

resulting in duplicated overheads and driving complex allocation rules which were

destroying significant value.

4.6. Increased market share/market power globally was of secondary significance and we note

that the New Zealand Commerce Commission was unconvinced of these benefits in the

merger application that preceeded the Fonterra merger being enabled by Parliament (refer

Commerce Commission Draft Determination NewCo Merger (27 August 1999)).

4.7. The structure of the industry in Australia is very different. All major players are already

vertically integrated entities engaging in all aspects of export and / or wholesale supply of

dairy product to the domestic market.

4.8. The key driver for the Murray Goulburn proposal seems to be to obtain additional milk

volume. There are undoubtedly benefits to be gained from additional milk volume. The

scale of the benefits that are likely to arise from the Murray Goulburn proposal is a matter

for the Tribunal to interrogate and determine.

4.9. However, the benefits that were derived from the Fonterra merger, which are well

described by Mr Norgate, may not be the most appropriate indicator of what benefits may

or may not result from the Murray Goulburn proposal.

4.10. While Murray Goulburn’s application seeks to draw parallels between the benefits that

have arisen from the Fonterra merger and the benefits that will arise from its proposal, it

makes no mention of the behavioural constraints that ensured the delivery of those

benefits to farmers, rural communities and ultimately the wider New Zealand economy. We

explain those constraints below.

Ensuring a competitive farmgate milk price

4.11. Export dominance in New Zealand meant that the major focus for regulation and for New

Zealand dairy farmers was on ensuring efficiency at the farm gate. Indeed, a sustainable

dairy industry relies on ensuring that there will be a competitive farmgate milk price.

4.12. It was important to ensure that farmers were not disadvantaged because of barriers to

entry imposed by a ‘lazy’ buyer (despite the comfort provided by 100% farmer ownership

and control). There was also a focus on ensuring a strongly competitive market for raw milk

through consumer channels in New Zealand, despite the implicit protection arising from

export prices driving the farmgate milk price.

4.13. Accordingly, Fonterra was and continues to be subject to two key behavioural undertakings

which are embodied in the provisions of the Dairy Industry Restructuring Act 2001:

‘Open entry and exit’

4.13.1. Fonterra cannot restrict entry or exit by farmers who back their supply with shares.

Every farmer in New Zealand has the right to become a Fonterra shareholder (subject

to two limited exceptions related to cost and volume).

4.13.2. Fonterra has to treat new suppliers in the same way as existing suppliers.

4.13.3. Fonterra also is constrained as to how much milk it can collect in a specified area on

long-term contract. Fonterra must make sure that at least 33% of milk solids within a

160km radius of any point in New Zealand is either supplied to an independent

processor or if it is with Fonterra, that it will be contestable at the end of the season.

Raw Milk Availability

4.13.4. Fonterra must make 5% of its milk production available to independent processors

at a regulated price that references Fonterra’s farmgate milk price. This was necessary

to achieve two objectives (a) lower the barriers to entry of independent processors

and (b) ensure the domestic market was well-served with volume at a competitive

price.

4.13.5. Every farmer is entitled to allocate up to 20% of their milk to independent

processors (subject to certain restrictions).

4.14. In Australia, the domestic market is more significant in driving the farmgate milk price

which means that implications for competition in the domestic consumer market, as well as

competition at the farm gate, are more equally weighted in Australia. That’s because it is

less clear whether domestic or export market conditions drive the price of milk at the

farmgate and margins that processors can obtain.

4.15. Behavioural undertakings relating to open entry and exit in New Zealand have had a

significant effect in exposing Fonterra to strong competitive pressure. A significant volume

of milk switches each year between Fonterra and its competitors, many of which are new

entrants that have entered the market post the formation of Fonterra.

4.16. Why is it relevant to Australia? Ensuring a dynamic and efficient dairy sector in Australia for

the long term is critical. There are undoubtedly efficiency gains to be made from

consolidating milk volume. However, it is important that competitive neutrality is

maintained by ensuring that decisions made in relation to Murray Goulburn’s application do

not preclude others in the Australian industry from undertaking efficiency enhancing

consolidation in the future. Behavioural undertakings may be necessary to ensure this.

Minimising detriment to farmers

4.17. We note that Murray Goulburn intends to embark on a capital restructure in 2014. There is

not enough information provided in the Application for us to judge how this may impact the

realisation and distribution of any benefits that may be obtained from the proposed

merger. However, it is important that this aspect is understood by the Tribunal for the

following reasons.

4.18. Fonterra’s constitution from the time it was formed until the change in its capital structure

in December 2012, stipulated that entry and exit would be within an independently–

advised ‘Fair Value Range’ (the Board almost invariably set its share price each year at the

mid-point of the range).

4.19. This feature was not imposed by legislation, but was voted on and supported by Fonterra’s

shareholders. It resulted from a legacy of Co-operatives previously under-pricing equity

during rapid growth in dairy production, which led to a cross subsidisation of new and

growing farmers at the expense of existing farmers. This caused significant tension in the

late 1990s and led to a moratorium on the two large co-operatives accepting new supply in

the South Island of New Zealand for a period. A mantra often used at the time (and

sometimes still referred to) is that ‘growth should fund growth’ for a Co-operative.

4.20. It is also worth noting that while in New Zealand ‘fair value entry & exit’ was not prescribed

by the statute, open entry/exit obligations under legislation created a strong incentive for

Fonterra not to underprice its equity by paying a milk price that was ‘too high’ (thereby

favouring new entrants over current shareholders) and vice versa.

4.21. In Murray Goulburn’s case, prior to any capital restructure (if implemented), there appears

to be no constraint on the Co-operative under-pricing its equity to attract supply at the

expense of existing shareholders. It appears not to be a concern of the same level for Co-

operative suppliers as it was for farmers in New Zealand. It will be interesting to observe

whether the potentially significant transfer of value from existing Murray Goulburn

shareholders to new members, or current members who are in a position to subscribe for

more shares at their current nominal value, becomes of concern on fairness grounds.

4.22. Under-pricing equity, particularly if there’s a prospect of obtaining a gain on listing, would

appear to pose a significant short-term threat to fair competition in Australia that, in the

absence of open entry/exit obligations, may have an enduring chilling effect on the

evolution of the sector.

Summary

4.23. To summarise:

4.23.1. Fonterra agrees that efficiency enhancing consolidation has the potential to bring

significant benefits to the Australian dairy industry.

4.23.2. Fonterra does not have enough information to provide a view on what benefits are

likely to arise out of the Murray Goulburn / WCB merger. Comment on specific

assertions relevant to the assessment of benefits is made in Part 2 of this submission.

4.23.3. However, due to the different issues that existed in the New Zealand industry and

that drove the merger, caution should be exercised before accepting that the benefits

that were realised as a result of that merger would translate to the Murray Goulburn

proposal.

4.23.4. A sustainable dairy industry relies on ensuring a competitive farmgate milk price and

long term competitive neutrality.

4.23.5. Fonterra does not have enough information to comment on whether behavioural

undertakings are necessary or appropriate in respect of Murray Goulburn’s application.

Certainly, the proposal does not create a monopoly player.

4.23.6. However, it is important that the Tribunal notes that the realisation of benefits from

the Fonterra merger were underpinned by constraints that minimised potential

detriment to farmers. To the extent that the benefits that have been realised as a

result of the Fonterra merger are deemed relevant to the Murray Goulburn proposal,

they should not be viewed in isolation of the constraints that were integral to their

realisation.

PART 2: Specific comment in response to Application and expert evidence

4.24. This section is in two sub-parts.

4.25. The expert evidence supporting Murray Goulburn’s application is repetitive. Sub-part 1 of

Part 2 provides a Fonterra perspective on some key themes that are relied on throughout

the Application to support assertions about the nature and scale of benefits that are likely

to be achieved from the merger proposal.

4.26. Sub-part 2 of Part 2 contains Fonterra’s perspective on certain specific factual assertions

contained in the expert evidence that Fonterra has had time to review.

Sub-Part 1: General themes

4.27. Fonterra makes the following observations in response to some of the key themes relied

on to support the assessment of benefits that will be obtained from the Murray Goulburn

proposal. Fonterra does not have enough information to make any comment on the impact

of these observations on the overall weighing of benefits versus detriments that the

Tribunal must adjudicate on.

The relationship between milk volume and market power

4.28. Fonterra’s assessment is that future growth in latent global demand will continue to

outstrip projected additional supply. Between now and 2020, Fonterra expects the volume

of global trade in dairy products to increase at an annual rate of approximately 5%. This

reflects an expectation that demand growth will exceed local supply growth in major

emerging markets, such as China, India, South East Asia, the Middle East and North Africa.

It is anticipated that this demand growth will be driven by a growing population, rising

incomes, urbanisation and the westernisation of diets.

4.29. It will be beyond the capacity of New Zealand and Australia, which together account for

about 5-6% of global dairy production, to meet demand growth. It will, instead, require

additional production from regions with the largest potential to expand production, such as

Europe, the United States and Latin America. As a consequence, New Zealandand Australia

will likely become less significant as a proportion of global production as milk pools develop

in new regions.

4.30. In addition, the growth of channels like the online dairy auction platform Global

Dairy Trade will enable prices to be discovered in an increasingly liquid and well-informed

market place, further reducing any notion that sustainable economic rents from weakly

differentiated dairy ingredients can be derived from market power.

4.31. In light of these factors, claims that consolidation will increase ‘market power’ in export

markets need to be viewed sceptically.

4.32. The issue is more one of industry efficiency from on-farm to export markets. Economies of

scale do matter in this context, but so do performance incentives created by competitive

pressures at the farm gate.

The relationship between increased milk volume and value

4.33. We agree that increased milk volume is a necessary pre-requisite to flexibility but the

relationship between milk volume and value derivation is far more complex than “more

milk will result in higher value products”.

4.34. Increased milk volume alone, will not deliver higher value outputs. Without a shift in

manufacturing footprint that enables the dairy sector to produce more value-added

products, increased milk volume will simply result in more of the same products being

made and can result in increased ‘forced make’ - having to make low value products to

avoid dumping milk which is dilutive to value. Caution also needs to be applied to any

assumptions that assume continuous growth in milk volume. Regardless of the merger the

potential for supply shocks arising as a result of constraints on key inputs and / or

environmental events such as drought remain. Any under or over pricing of milk could

significantly distort economic and environmentally sustainable growth in milk production.

4.35. Scale was not the primary driver of the Fonterra merger and has not been the main driver

of the merger benefits. The New Zealand experience has shown that small niche dairy

processors with highly efficient dedicated plants are able to produce higher returns for

suppliers. However, such manufacturers are obviously also more exposed to commodity

price volatility and changing consumer preferences over the long term.

Legal form is an insufficient factor to ensure efficient outcomes

4.36. During the Fonterra merger discussions, the legal form of Fonterra as a co-operative was

considered insufficient, on its own, to ensure efficient outcomes and a contestable market

at the Farmgate. The virtuous incentive effects of a farmer-owned co-operative were

supplemented by the legislative behavioural obligations noted earlier.

Debt and the ability to realise benefits

4.37. Fonterra agrees that investment is needed in order to grow. However, high debt levels

expose dairy processors to external shocks and inhibit capital investment required to

promote growth and innovation and realise benefits.

4.38. When Fonterra merged, debt levels reached approximately 60%. Fonterra’s ability to take

on this debt level was supported by the fact that Fonterra had significant offshore non-core

assets that it could have sold to quickly and easily to reduce its leverage should that have

been necessary.

4.39. However, it is important to note that this debt level was seen as inappropriately high

because it inhibited Fonterra’s ability to grow which in turn inhibited its ability to return

more money to its farmers. As a result, Fonterra was forced to embark on a focussed

programme to reduce its debt level.

Volume Estimates

4.40. Fonterra has not seen (nor has it provided to Murray Goulburn) the various volume

estimates that are redacted throughout the application. Fonterra would be happy to

provide information to the Tribunal on a confidential basis to verify the figures provided by

Murray Goulburn if required.

Sub-Part 2: Fonterra response to specific assertions in expert evidence

STATEMENT OF MALDWYN BENISTON DATED 28 NOVEMBER 2013

SUMMARY: Lay witness statement regarding growth in dairy export markets and Australia's

failure to capitalise

KEY ARGUMENT SUPPORTING FACTS PARA

REF.

FONTERRA COMMENTS

Over the past decade, Australia's

dairy export industry has contracted

approximately 40%,

at a time of substantial grown in

Australia's key

export markets.

None. 63 The largest driver of declining export volumes

out of Australia is the contraction of milk volume.

Whether to serve domestic

or export markets with the milk that is available to a

dairy processor in Australia

is a choice. A merger between Murray Goulburn

and WCB will not change

the proportion of milk that is currently channelled into

the export market unless

Murray Goulburn chooses to withdraw supply from the

domestic market.

The supply of Ingredients to

international

markets is dominated by

Fonterra.

Fonterra currently exports

approximately 1.7

million tonnes of Ingredients per year,

with approximately

37% market share.

67 Fonterra exports 2.7 million tonnes of dairy product

globally (including non-New

Zealand sourced exports). This amounts to 20% - 21%

of total global dairy exports.

This decline in

exports has

coincided with growth in

international dairy

markets. As a result, Australia's

export volume share

has dropped from 15% in 2002 to 7%

in 2012.

Over the same time

period New

Zealandhas increased its share

of international

ingredients sales from 30% to 37%.

Figure 5:

Comparison of the

performance of Australia and New

Zealand in export

markets between 2002 and 2012.

Source: ABARES

dairy tables 2012; New Zealand Dairy

Statistics 2011-

2012.

70 See above.

In contrast to

Australia, New Zealanddairy

industry has

flourished over the past decade, due to

the formation and

growth of Fonterra.

Australia does not

have the scale efficiencies or

manufacturing

technology that Fonterra has

developed. It has

also not had the milk growth that has

been occurring in

NEW ZEALAND.

None. 72-75 Although impossible to

predict with certainty, it is likely that whether or not

the Fonterra merger

occurred, the growth of the dairy industry in New

Zealand would have been

the same. This is because, in New Zealand, dairy is a

more profitable use of land

than other farming options (sheep and beef). There

was significant growth in

dairy in Southland and Canterbury before Fonterra

was formed.

MG's in-market

offices in various

countries could be used to form the

basis of an in-

market global

network if there was

an expansion in

scale of MG's Ingredients

business.

Note: this section

contains significant

redactions.

85-86 Scale, on its own, is unlikely

to make any difference to

the effectiveness of an existing in-market global

network. There may be

more product to sell

through the network but

the effectiveness of the

network will not necessarily increase.

MG's Ingredients export sales over

the past 10 years have declined in line

Supporting figures redacted.

92 There may be a transfer of volume from WCB to MG

but the overall volume for Australia would remain the

with the decrease in

Australia's overall

dairy exports.

This is due to the

limited milk supply

available to MG to service export

markets. This has

forced MG to pull out of several markets.

MG has reduced its

footprint in the

Middle East and now

only sells to high

value or highly strategic clients.

same unless Murray

Goulburn chooses to

dedicate more milk to export products rather than

domestic supply post

merger.

MG's acquisition of WCB will improve

the international

competitiveness of Australia's dairy

industry:

Scale will be enhanced through

MG's access to

WCB's milk pool;

Production efficiency

will be enhanced

through synergies consolidating MG's

and WCB's existing

businesses and manufacturing;

Enhanced scale and efficiency will create

a significant

Australian export company. This

creates benefits for

MG which flow through the

Australian dairy

industry;

Will allow MG to

grow with its

customers;

This will restore

confidence in MG brand and the

Australian dairy

industry;

Increased scale

enhances MG's

ability to manage risk and optimise

product mix;

Having a significant

Australian export

company increases

118-

126

See comments above.

For benefit to be derived

from the merger, Murray

Goulburn will need to be able to extract more value

from the same milk volume

and asset base than Murray Goulburn and WCB have

been able to operating as

separate companies.

There is not enough

information available in the Application for Fonterra to

form a view on whether this

is likely or not but the following considerations are

relevant:

- Rationalisation of assets can limit the ability to

optimise production

mix.

- Greater milk volume

across a more limited asset base can lead to

greater forced make

over peak production periods. Depending on

what commodity prices

are doing this can be value dilutive.

- Large volume

customers generally purchase product at the

lower end of global

pricing.

- Smaller more nimble

processors have tended

the ability of other

Australian producers

to compete on international

markets;

Without a significant Australian export

company, the

Australian dairy industry will

participate in a

fragmented manner

on the international

market;

Will allow the

merged entity to

consolidate the manufacturing

processes that is

necessary for Australia to thrive in

international

markets.

to be able to access

smaller customers, who

access product at higher global prices at a

greater premium.

Fonterra’s understanding is that

WCB has historically

paid a higher farm gate milk price than MG

despite being smaller.

- Whenever two

processors merge there

is always a risk that

customers that experience

consolidation in supply

will seek to reduce the risk inherent in that by

seeking to diversify.

Japan is a premium market for cheese.

With the combination of

Murray Goulburn at 46kt and WCB at 11.5kt

out of a total market of

90kt it is possible that some of this product

could be allocated to

other suppliers in different geographies.

Fonterra does not have

enough information to judge whether this is

likely or not.

- There will undoubtedly

be synergy benefits as

a result of the proposed merger.

- If synergy benefits are

passed through to milk price (rather than

customers) the question

arises as to how the merger will impact on

Australia’s export

competitiveness.

- If synergy benefits are

passed through to customers (as one

would expect in order to

increase competitiveness in both

the domestic and export

markets) then they

won’t necessarily

translate to higher

farm-gate milk prices at least in the short to

medium term.

It is unclear from the publicly available

information provided in the

Application what Murray Goulburn’s intended

strategy is. However, these

decisions will impact on the

timing and nature of

benefits that will be derived

from the merger.

MG's acquisition of WCB will increase

the value of

Australia's exports through leveraging

MG's customer

relationships

Increased scale and efficiency enhance

the merged firm's

ability to leverage its existing relationships

with premium

customers by offering value add

and innovative

products;

As a significant

global exporter with scale operations, MG

is best placed to

take volume share from Fonterra. MG

is able to leverage

customer relationships in a

more innovative and

flexible manner than Fonterra is currently.

127-

131

The ability to deliver value add and innovative products

is not assured by increased

scale alone. The factors that influence the ability to

deliver value add and

innovative products are primarily manufacturing

footprint and research and

development capability.

Fonterra has not shared any

information with Murray Goulburn about how it

operates its customer

relationships or how it is able to operate its customer

relationships. We are

unsure how Murray Goulburn could substantiate

this comment other than by

accessing information from within Fonterra.

However, for the reasons

discussed at paragraphs 4.28 – 4.32, the ability to

take Fonterra’s market

share is irrelevant.

To the extent that the share

taken impacts Fonterra’s Australian exports the

overall impact for the

Australian Dairy Industry will be neutral.

In order for the Tribunal to

conclude that the Australian Dairy Industry as a whole

will benefit from the

proposed merger Murray

Goulburn must show that it

is capable of making the choices and investment

necessary to open new

customer channels or new opportunities with its

existing customer base.

Transfers of wealth from one Australian based

processor to another will

not lead to an increase in net public benefit.

MG's acquisition of

WCB will increase the value of

Australia's exports

through increasing exports of nutritional

products

The Nutritionals

market has seen dramatic growth

recently.

MG's previous

experience and

customer relationships will

allow the merged

entity to take advantage of the

growth in the

Nutritionals market.

The merged entity

will have the scale to

invest in efficient manufacturing

infrastructure, as

well as access to raw milk inputs.

132-

139

The ability to take

advantage of the growth in the nutritional market

depends on a number of

factors including having the manufacturing footprint to

do so. Given that nutritional

returns tend to be at the higher end of the value

spectrum it would be

surprising if current demand isn’t satisfied up to Murray

Goulburn’s installed

capacity.

GOS is available for

purchase as an ingredient on the international market.

Owning the ability to

produce it may lower costs, increasing competitiveness,

but it does not lead to an

ability to produce more nutritionals (unless, for

some reason, Murray

Goulburn’s ability to acquire GOS has been constrained).

While WCB has GOSC

capability it has no infant formula capacity or

capability.

Converting driers to

nutritional driers or

installing new nutritional driers would fit within

Murray Goulburn’s current

capital expenditure capabilities (before WCB

take-over).

The impact of capital constraints on Murray

Goulburn’s ability to make

such an investment post

merger should be

considered in forming a view on the likelihood and

timing of such benefits

being realised.

Australia has a limited

window of opportunity to

take advantage of growth in international

markets.

There is a limited

opportunity for the

Australian dairy industry to take

advantage of the

current growth.

If Australia is unable

to increase its milk production it risks

losing relevancy on

the international market.

140-

141

For the reasons set out

above at paragraph 4.28 –

4.32, we think that Australia will remain

relevant in regional dairy

supply.

Increases to the

value of exports translates into

higher farm-gate

prices.

Acquisition of WCB

will assist MG in leveraging customer

relationships to offer

higher value products and to take

advantage of growth

in the Nutritionals sector. These

strategies reduce

MG's exposure to price volatility. As

MG is a cooperative,

these factors directly translate into a

higher farm-gate

price, which is of benefit to MG's

suppliers and the

Australian dairy industry as a whole.

142 See comments above in

relation to 132 – 139 in relation to nutritionals

growth.

As a stand-alone entity, WCB does

not have the

technical capacity,

IP or know-how to

expand into the

Nutritionals market. In addition, if WCB

remains a stand-

alone entity, the Australian dairy

industry would

continue to be fragmented, which

144-

146

WCB as a stand-alone entity has the ability to

invest in assets that would

enable it to supply the

nutritionals market should it

choose to do so.

may hinder the

development of milk

growth.

If WCB was acquired by

Saputo, the

fragmentation of the Australian dairy industry

will continue

148 For the reasons discussed

above, fragmentation in and

of itself does not lead to lower farmgate milk prices.

STATEMENT OF CHRISTOPHER PHILLIPS DATED 29 NOVEMBER 2013

SUMMARY: Expert report key regarding on key drivers of milk production, pricing and exports

and potential impacts of MG/WBC merger, including as compared to Saputo and Bega

proposals (also provides substantial background / industry information)

KEY ARGUMENT SUPPORTING FACTS PARA

REF.

FONTERRA

COMMENTS

The percentage of

Fonterra's

Australian

production that is

exported has varied

over time – recently powder mixture

exports from

Australia to New Zealandhave risen

sharply; assumes

that this is re-blended with other

ingredients and

exported to third countries.

None. 135 No Fonterra Australia

products are

exported and re-

blended in New

Zealand.

Australian export volumes driven by a

variety of macro

(industry) and micro (company) factors.

These include the

flexibility of product mix, company

decisions, extent

that production exceeds domestic

demand, fact that

long-term storage not viable, and

international factors

impacting profitability.

In general, companies have limited product mix

flexibility within a season,

but can change product mix over the longer term.

Company level decisions

impact volumes (eg Fonterra moving ice cream

manufacturing from WA to

NEW ZEALAND; DFG shutting QLD export plants

in favour of domestic

drinking milk markets).

149 -

159

Fonterra did not move ice-cream

production from WA

to New Zealand.

Scale and structure

of major international dairy

companies and

buyers, and policy decisions of major

export countries,

impacts whether Australian

processors will

continue to have sufficient scale to be

Size of EU and US

producers mean small production shifts can

significantly alter global

supply/demand balance, affecting export prices and

returns. Eg: EU planning to

remove domestic production quotas in 2015,

which is likely to increase

exports from 2016; Irish government plans to

175 -

189

See paragraph 4.28

to 4.32 above. Fonterra does not

agree that scale is

necessarily a determinant of export

success.

See paragraphs 4.11

– 4.23 above. Farmers in New

globally

competitive.

increase production from

2015 by 50%.

Most large US and EU companies are gearing up

for export growth; can use

large domestic markets to cross-subsidise export

growth.

Table 7: World dairy

increasingly concentrated in

past two decades – 400-500 mergers occurred

(Source: Rabobank global

dairy Top 20 Aug 2013).

None of MG, Bega or WBC

are in the top 20.

19 of the top 20 have

undertaken a new

acquisition, JV or capital restructure in 2012. Nestle

was ranked #1 in 1999 and

2013; its dairy turnover has doubled in that time.

Entry of 2 Chinese

companies into top 20 indicates importance of

exporters having sufficient

capacity and size to compete with them in that

growth market.

Three in the top 20 are

cooperatives (Fonterra,

Freisland/Campina, Arla Foods); achieved scale

through amalgamation. All

have operations in multiple countries through JVs /

subsidiaries. In each case,

farmers traded of competition for farmgate

milk to secure processing,

marketing scale and synergies.

A number of the top 20 are

also major buyers (Nestle, Unilever, Danone, Meiji,

moringa and Mengniu).

Estimates that Nestle's global purchases exceeds

Australia's total

consumption of dairy products.

Buyers also increasingly

Zealand did not trade

off competition at the

farmgate to achieve scale. On the

contrary farmers

were careful to ensure that

competitive tension

was maintained at the farmgate and this

was ensured by the

behavioural undertakings

enshrined in statute

and described above. A sustainable dairy

industry relies on the

maintenance of competitive tension

at the farmgate.

international (eg in food

service, pharmaceutical,

health and infant formula), highlighting the importance

of export oriented

producers having appropriate structures to

deal with these companies

and their integrated logistics systems.

A MG/WBC merger

would have a

positive effect on

both aggregate

company exports and export unit

values.

Merger will generate

operational synergies in

areas such as

administration, finance,

marketing and exports (including Japan office).

Bega has estimated such

saving publicly at $8m per annum, so there is reason

to expect that MG can

make at least similar gains.

MG has significant milk

collections and processing

plants of its own in Western

Victoria, which will generate

logistical efficiencies.

MG should also be able to

more quickly adjust current

factory throughputs and

product mixes to improve

plant profitability and

maximise the combined

firm's potential to produce

more high-value, higher

margin products for export.

In particular, could process

the alternative uses for the

50-150 million litres of farm

milk that WCB now collects

and on-sells with minimal

processing.

Improved bargaining

position with domestic

supermarket chains, and

will assist to consolidate the

214 -

219 Fonterra understands

that WCB no longer

on-sells milk. This

should be validated

with WCB.

It is unlikely that

supply competition would be reduced in

Japan as a result of

the proposed merger given its status as a

premium market.

Japan is a target for global processors. It

is possible that there

could be volume loss as Japanese

customers could look

to reduce exposure to consolidated supply

by seeking to

maintain supply from diverse geographic

sources / alternative

suppliers.

See comments above

at paragraphs 4.28 –

4.35 above re the relationship between

scale and value and

scale and market power.

As previously stated it is unclear how the

addition of largely a

bulk cheese & SMP/butter producer

would aid Murray

Goulburn in accessing higher value

products.

supply of high value

ingredients like Lactoferrin

to export markets like

China.

Would reduce supply

competition in specific

export markets such as

Japan and the USA.

A merged MG/WCB would

process around 4,000

million litres of milk. In

volume terms this would

give it reasonable global

scale. (However, merged

company would remain well

outside the world's top

dairy companies in turnover

terms).

STATEMENT OF KIETH MENTIPLAY DATED 29 NOVEMBER 2013

SUMMARY: Summary of product processing, MG's operations (including logistics, production

capacity, capability and mix), industry conditions (constraints, competitors and barriers to

entry), and effect of the MG acquisition (including compared with Bega and Saputo proposals).

KEY ARGUMENT SUPPORTING

FACTS

PARA

REF.

FONTERRA COMMENTS

Milk swaps generate

$50-60m in logistics savings across the

Australian Dairy

industry.

Estimate. 35 Fonterra is a participant in the

current milk swap programme. Fonterra has seen benefits, in the

form of logistics synergies, in the

order of from the current programme.

Fonterra’s estimate of the potential savings achievable from

larger scale cooperation vary

STATEMENT OF Robert Arthur Poole DATED 28 NOVEMBER 2013

SUMMARY: Lay witness statement regarding the cooperative structure of Murray Goulburn

and the acquisition and pricing of raw milk.

KEY ARGUMENT SUPPORTING

FACTS

PARA

REF.

FONTERRA COMMENTS

The cooperative structure and operation of Murray Goulburn (MG)

Fonterra is the largest

processor of milk in the

world.

Fonterra acquires

1.8 billion litres of

milk annually from

1400 Australian

farmers representing about

20% of Australia's

raw milk supply.

Fonterra has 8

processing plants

in northern Victoria and the Riverina in

southern New

South Wales.

Source: Page 24 of

an IBIS World Report (RAP31);

extracts from

Fonterra's website (RAP32).

117 -

119

In the 2013 season

Fonterra Australia

acquired 1.5 billion litres

of milk.

Fonterra Australia does not have 8 processing

plants in Northern

Victoria and the Riverina region.

Fonterra Australia has 8 primary processing plants

in Australia (11 in total).

4 of those primary processing plants are

located in Victoria, 1 in

New South Wales and 3, including the recently

acquired Tamar Valley

Dairy yoghurt plant, are located in Tasmania.

Milk is often transported

for processing from one region to another, but

because raw milk is

perishable it is never transported

internationally.

143 -

146

In the absence of

investment in technology, the costs associated with

the transportation of raw

milk for processing are high and processors seek

to avoid this where

possible.

Raw milk prices

The merged entity will

continue to compete in the same areas as other

dairy producers seek to

acquire milk, and the increased milk price paid

will act as an incentive

to other dairy processors to match the price paid.

249 Fonterra agrees that

other dairy processors are likely to compete for milk

in areas where they have

the ability to process that milk and in circumstances

where there is an

opportunity to attract supply and / or a risk of

losing supply.

Fonterra Cooperative Group Limited

20 December 2013