This article provides an overview of a presentation made from Fonterra at our annual investor conference last month – June, 2011 about the NZ dairy sector. The presentation was said to have been one of the most interesting of the day from the clients who attended.

The presentation began with Jonathan Mason, Fonterra’s CFO, stating that NZ is a fantastic place for dairy farming, if not the best in the world. New Zealand’s abundance of water gives us a clear cost advantage compared to other countries around the world. Our rainfall averages two metres a year, more than double the world average of 0.8 metres, therefore offers a strong competitive advantage when it comes to our ability to provide pasture for grazing dairy cows. Other countries around the world have to supplement feed their stock to make up for the lack of grazing. NZ also has a stable political landscape and a reputation for safe, high quality food products in our favour.

Fonterra is a co-operative owned by 10,500 farmer shareholders. Some other interesting facts about Fonterra include:

• They are the world’s largest exporter of milk powders.

• They have revenue of $17bn and operating earnings of $1bn.

• They have 432 tankers across 17 depots

• They operate 86 plants in NZ

• They have the largest milk dryers in the world.

• They use 11 NZ ports to send 140,000 containers each year to its millions of customers around the world

• Recently, Fonterra announced an increase in its forecast profitability for 2011

For a country that only accounts for approximately 2% of the world’s dairy production, NZ exports 95% of this offshore. This is in contrast to other dairy producing countries around the world where the vast majority is sold domestically.

China is a key export market for NZ agriculture that is continually growing as people in China migrate from rural areas to the cities – it forecasted that 350 million Chinese people will do this over the next 15 years. This movement leads to a growing middle class, which will see a rise in incomes, and an increase in demand for higher-value food products such as dairy produce and meat. Fonterra exported 31% of its dairy produce to China in 2010. China’s growing demand for high-value agricultural products bodes well for New Zealand.

The agriculture sector is a difficult investment theme for many New Zealanders to gain an exposure to. With the average dairy farm priced at$3.5m (according to the Real Estate Institute), most investors have limited options.

However, this may all change in the near future if the company is to be listed on the stock exchange. Owning a unit in this fund would not allow any voting rights, these would continue to be retained by farmers. Investors however would have access to distributions and changes in the market value of the units. It is not known exactly when such a move will happen, it could be as early as 2012, or it may not happen at all, should the Fonterra board decide not to proceed.

To you the investor, there are several reasons why you should keep a close eye on Fonterra - it is one of the top six dairy companies in the world, accounts for ¼ of our export earnings and is accountable for 7% of our GDP.

In addition, agriculture is the backbone of New Zealand’s economy. Having Fonterra as an investment option will provide many Kiwis the ability to invest in what really is ‘NZ Inc’.

With the long term growth potential for this dairy giant being huge – they are definitely worth watching.