NZ milk formula exporter says industry in crisis mode after DCD scare prompts Chinese claims that NZ milk is 'toxic' and 'poisonous'

By Bernard Hickey

New Zealand milk powder exports to China are in disarray and exporters are in damage control mode after publicity around the discovery of traces of DCD in milk powder has blown up into full scale crisis, one exporter said after issuing a profit warning to the stock exchange.

New Image Chairman Graeme Clegg, who is making a takeover bid for the shares in New Image he doesn't already own, told the government and the dairy industry had handled the release of the information poorly, leaving exporters to scramble in response to the concerns of frantic and worried customers.

"Our Taiwan company had over a 1000 phone calls on the Friday, overloaded with fear," Clegg said.

"In China with our infant formula there's been a huge overload of concern," he said. "In China there are TV programmes and advertisements virtually saying NZ milk is poisonous for infant formula," he said, pointing out Chinese competitors were spreading exaggeration to win back market share.

"They were hurt badly because imported products have taken over a large slice of the market and this was their opportunity to fight back with whatever propaganda they felt would do the job -- fair or not -- it hasn't worried them in China. There are a lot of concerned monthers," he said.

"In Malaysia we've had a terrible lot of trouble. Poeple thinking some of our other products might be contaminated or poisonous that don''t even have dairy in them.

Clegg was particularly critical of the lack of warning from the government, saying exporters only needed a few days to test their products so they could demonstrate to customers beyond doubt that their products were safe.

"We've had no opportunity to prepare or defend ourselves with the way it has been uncovered. One wonders after years of experience that not only the government or the industry would have been far better prepared," he said.

Clegg effectively controls just under 70% of New Image's shares. His New Image Trustee Ltd has bid 26 cents per share for the rest of the company. The shares were last at 27c.

'Melamine = DCD'

Clegg said one of the major challenges for New Zealand in China was that the Chinese symbols for melamine and DCD are very similar.

In China there is a link between the two. That should have been a warning to all exporters that could have been at risk so they could have been prepared.

"We could have had products tested. There was plenty of time before announcements made. All exporters could simultaneously have gone to their clients and said: 'look 'this is a responsible issue, one that is not a food safety concern and New Zealanders are continuing to show the way, that we test everything, and that even though it's a minor issue, we're still stopping the use of certain practices that could affect our reputation," Clegg said.

"Any PR person could have done a much better job," he said.

"Every inflant formula manufacturer will be in crisis and damage control mode, just as we are. Phones have been red hot, emails have been coming in."

Clegg said a big part of the problem was there was no single source of information to distribute to customers.

"There was not one press release that did the whole job. We ended up sending 7 or 8 different press releases to put people's minds at ease," he said, adding the only way New Image was able to reassure customers was to prove through tests there was no traces of DCD.

'Could not have been any worse'

Clegg said exporters were now getting tests done in export markets and in New Zealand, but there were now backlogs.

"For goodness sake, they should have consulted and advised the industry. Maybe they feared there would be a leak, but it couldn't have been done worse than what it has," he said.

"They totally underestimated the likely response and it's mainly it's in China with many people in the Chinese milk industry with glee making the most out of this because of the poor way it's been handled. They could not have done that if we had made it clear how insignificant the amounts were and everybody understood fully there was no risk involved," he said.

"Because we're slow on that there's a link now that says it's as bad as Melamine. It's affected the country's reputation. (Chinese competitors are saying) that NZ milk is toxic and they're grabbing as many customers as they can over it."

'Poor government preparation'

Clegg said he had heard there was now a risk of massive recalls in China and elsewhere. He pointed out Chinese officials had now placed a complete ban on any imports with any traces of DCD.

"If any New Zealand product goes into China with a trace, they (the exporter) are dead."

"A couple of days work with experts in authority beforehand surely could have picked this up. I'm upset about it and I feel we've been let down," adding that government to government discussions could have stopped the 'zero tolerance' rule before it was put in place.

"When there's concern in the public, they stop, and when people stop, business is lost, market share is lost and brands lose because of doubts."

Key responds

Prime Minister John Key told a news conference he had not been advised that trade had stopped because of concerns about DCD, saying if there had been a bigger problem then the New Zealand dollar and Fonterra's unit price would have been affected more heavily. He said any consumer would have to drink a swimming pool sized quantity to have had any effects.

"The government has accepted that there are no health issues from the traces of DCD detected. There are always risks when there is any kind of notificiantion because people can extrapolate that information," he said.

He rejected that the government had not been working with Chinese officials, saying Trade Minister Tim Groser had been across the issue.

Key said the first he knew of the notification that traces had been found was January 18th, while the Ministry for Primary Industries was notified at the end of October.

Other point of view

Another infant formula exporter, Carrickmore MD Chris Claridge, said the news hadn't appeared to have affected sales yet.

"The Ministry of Primary Industries and Fonterra have handled as well as they could," he said.

(Updated with details from PM John Key and Carrickmore MD, plus Clegg's takeover bid).

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As long as Chinese Quality Supervision, Inspection and Quarantine do not ban NZ baby formula, Chinese cosumers are rational enough to not abandon NZ dairy product.
NZ's export of baby formula is worth $600 mn NZD top. What is more worrying is NZ's export of wholemilk powder and skimmilk powder worth $7 bn NZD.
What Fonttera needs to do now is tell her customer that why she hid the evidence of the DCD residual in milk for 4 month!!

I believe it may have had more to do with the timing of the share sale than anything, imagine where those prices would have gone if this was known prior. Manipulation of the highest degree.
Chinese women should consider feeding their babies themselves, there is no better infant formula than that which comes from those two things on the front of womens' chests -yes?

Why did we feel the need to shoot ourselves in the foot, as I understand where there are limits on DCD these test results were miles within them and in this case there wasn't even a limit to breach?

So there was absolutely no breach of anything and no health implications, so why was it reported?
The idea that we would earn brownie points with customers by showing how open and diligent we are is ridiculously naive.  The norm is to report when there is a breach or a known health risk, the public therefore naturally assume this is an issue precisely because it has been reported and is in the news.

Of course it is toxic and poisonous.  Just like out poor quality housing that suffer from poor workmanship, most of them leak and are toxic to live in so I wouldn't recommend Chinese investors buy them at all.

wheres Tim:
He rejected that the government had not been working with Chinese officials, saying Trade Minister Tim Groser had been across the issue.
Key said the first he knew of the notification that traces had been found was January 18th, while the Ministry for Primary Industries was notified at the end of October.
If someone has been working with Chinense Officals, what is that nature of that work:
eg: statement from Chinese Officals to local consumers confirming NZ product all A Ok
eg: statement from Chinese Officals confirming NZ product imports unrestricted
Supp. Q: When were Chinese Officals told??
Would Chinese officials have be told before JK?
- we don't know.

Many chinese officals are corrupt, many others very nationalist, nepotism is rife....and if the party says so, it will be blocked.
All's fair in love and money making in china.

Tim: IS this correct?
China demands explanation - China's food quality authority has asked for a detailed risk assessment report on dairy products in response to the detection of New Zealand milk powder containing the chemical DCD. China's General Administration of Quality Supervision, Inspection and Quarantine met with New Zealand's Ambassador to China, Carl Worker, and asked for a more detailed report from New Zealand authorities

Tim: And the trade risk is now a full-on reality as Fonterra, officials and other New Zealand dairy exporters, who are suffering collateral damage to their own brands, try to remedy the situation and rebuild trust in New Zealand as the safe source of food.
This aspect of the New Zealand brand positioning should not be underestimated. It is why New Zealand dairy products have commanded a premium price in overseas markets (predominantly China but also in Taiwan and Southeast Asia).
Fonterra shareholders should be asking why they are paying the PR firm high fees for reputation management after the clear failure to communicate news of the DCD discovery in a timely fashion to officials and consumers in both countries, let alone the Chinese media which has strongly panned New Zealand's reputation for food safety in the wake of the mismanagement.

Tim: this food stuff really does matter:
EG: French owned Oz cheese company LISTERIA 3 deaths, 26 cases.
Victoria's Department of Health maintains it acted promptly to contain the outbreak, which came to the attention of authorities in mid-December and led to the recall of more than 100 cheese products, but it has warned there could be more cases and further fatalities.

Read more:
On January 7, Jindi's French-owned parent company, Lactalis - which bought the gourmet cheese maker from Menora Foods in November for an estimated $20 million - voluntarily committed to a quality assurance program that ''significantly cranks up'' its existing food safety standards and has satisfied Victoria's chief health officer.
Dr Ackland added that there was ''no suggestion whatsoever'' that Jindi had not been complying with Dairy Food Safety Victoria's stringent food safety regulations.
''The problem with listeria is it is ubiquitous - it's all over the place and from time to time it does pop up, and it loves soft cheese,'' he said.
Investigations are continuing to determine how the listeria came to resist the usual safety protocols and contaminate the Jindi products.
Jindi's chief executive, Franck Beaurain, has not returned telephone calls from Fairfax Media for more than a week.


Fonterra plays down Chinese milk powder destruction reports
"The market really focuses in on food quality, which can be a bit hard to get to the bottom of things," he said.

Why do the exporters of baby infant formula expect the government to do their marketing and provision of advice to consumers? Do they not have their own systems in place.
I can't see how you can have it both ways, expect to make the lucrative profits, without at least having some risk mitigation strategy in the event of some misinformation.

 Frankly , I have little sympathy for  the Dairy Industry and its problems . They're an arrogant lot who hold Kiwi's to ransom with ludicrous milk and dairy product prices.
Maybe if the Chinese stop buyingNew Zealand milk, then the price of milk will come down on the doestic market, and we wont get screwed as we have been for years
No one has yet been able to explain to me why milk is cheaper in Australia, India and South Africa , ( significantly so inthe latter two )and all these countries IMPORT MILK !.  

Perhaps lack of supermarket competition has something to do with it.  I can buy 4 litres at the supermarket here for $9.70 or 4 litres at BP 2 Go for $6.50.The supermarket here doesn't even sell Anchor (quite a few Foodstuff supermarkets no longer stock Anchor) and the BP milk is the Anchor budget brand Dairy Dale.  So is Fonterra really the one to solely blame for high dairy prices, Boatman?

DCD = Does China Do it too ?

China still investing in processing NZ milk, despite DCD, Hasn't NZ got the capability to process milk into baby formula to then sell to China? How does such an investment add to the gainful development of the NZ economy?

Big player with lots of $$ like Fonterra is too risk averse given the average age of her share holders are over 50+.
With the introduciton of Trading Among Farmers, I personally hope Fonterra can spare some $ investing in infrastructures.
Well, the $$ from China is not like competing with any other source of fund within NZ. The $$ from China will boost local economy (I know there are considerable amount of riskes attached with the fund. Let's save for argument later please.).
Another key reason that China invests in infant formula is that the tarrif rate just droped from 20% to 5%.
I guess the most important question to ask is why none of NZ companies invest in building infant formula plant -- maybe because of lack of fund or maybe because of risk averse or maybe because some other reasons. If you know the problem, then you can start to address it.

It seems Chinese companies are enthusiastic about the prospects of investing in processing NZ milk into baby formula, so why wouldn't Fonterra. If Fonterra farmer and external shareholders want to maintain return on their shares, Fonterra will have to retain earnings to invest and develop, won't they? The semi retired Fonterra shareholders can't be risk adverse if investing in China and other parts of the world.
Chinese $ might not be competing for NZ $ due to apparent lack of, but they are competing for milk to turn into baby formula, particularly with increasing awareness of resource and environmental limitations in converting land to dairy. How will the $$ boost the local economy? By building a processing plant? The farms already exist, and the prospective suppliers will cash in shares whose capital was accumulated by previous generations contributing to a cooperative structure, so as to pay off debt to aussie banks et al.
I suspect the problem is lack of unifying leadership and a meaningful vision, due to political interference, self interest, and outdated economic philosophy and rational.

Omnologo - they don't want farmer suppliers - they want it bulk tendered. DIRA won't supply all they need, so the question is - where will their supply come from?

From existing farms one way or another. Must be a natural resource NZ doesn't need or can't use.

Cheer up Omno - the silver lining is that there is a good chance Fonterra will lose enough supply that DIRA will no longer apply ;-) That will put the cat among the pigeons. I'm hearing the high share/unit price is hurting supply.

Informative comments as always CO cheers.
I'm not losing sleep, I suppose we are part of the global village, we need the money, NZ invests in other parts of the world, so on and so forth. However on the topic of foreign investment and China, I do wonder if the rational behind Fonterra being allowed to invest in China is different to the rational allowing foreign investment in NZ? They don't need our money the same as we seem to need theirs.

Mr Jensen from Network may help us to understand world better:
Jensen: You have meddled with the primal forces of nature, Mr. Beale, and I won't have it!! Is that clear?! You think you've merely stopped a business deal. That is not the case. The Arabs have taken billions of dollars out of this country, and now they must put it back! It is ebb and flow, tidal gravity! It is ecological balance!
You are an old man who thinks in terms of nations and peoples. There are no nations. There are no peoples. There are no Russians. There are no Arabs. There are no third worlds. There is no West. There is only one holistic system of systems, one vast and immane, interwoven, interacting, multivariate, multinational dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, reichmarks, rins, rubles, pounds, and shekels.
It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today. That is the atomic and subatomic and galactic structure of things today! And YOU have meddled with the primal forces of nature, and YOU WILL ATONE!
Am I getting through to you, Mr. Beale?
You get up on your little twenty-one inch screen and howl about America and democracy. There is no America. There is no democracy. There is only IBM and ITT and AT&T and DuPont, Dow, Union Carbide, and Exxon. Those are the nations of the world today.
What do you think the Russians talk about in their councils of state -- Karl Marx? They get out their linear programming charts, statistical decision theories, minimax solutions, and compute the price-cost probabilities of their transactions and investments, just like we do.
We no longer live in a world of nations and ideologies, Mr. Beale. The world is a college of corporations, inexorably determined by the immutable bylaws of business. The world is a business, Mr. Beale. It has been since man crawled out of the slime. And our children will live, Mr. Beale, to see that perfect world in which there's no war or famine, oppression or brutality -- one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock, all necessities provided, all anxieties tranquilized, all boredom amused.
And I have chosen you, Mr. Beale, to preach this evangel.
Beale: But why me?
Jensen: Because you're on television, dummy. Sixty million people watch you every night of the week, Monday through Friday.

Well it seems the new share price level reduces the relative land price (by the $7whatever less the old $4.52 times per ha production ~ talking 1,700 kg/ha places etc). Point is as the new share price wobbles round folk are not as happy to pay up.

The other thing we have found is not all kg are equal. There are kg off the farm as a unit. But the kgs that come out of the silo (grain) are not worth the same. Esp. When the new share price is paid for and if to get the grain kg some pay anything up to $1,000 per hd feed and added working capital as fwe fly past 4. Model the systems and less is more for the land. While total dollars needed rise

Will rate values reflect this.

The reason why the Chinese are setting up in nz and we aren't is that their risks are low, they are looking to become totally vertically integrated by getting control of the raw material. It's simply to hard and risky for us little old kiwis to build a factory and then try to gain permanent market share in China - plenty have tried and all have failed or now controlled by offshore players or luckily by fonterra. Fonterra understands the costs and risks of  trying to build a new brand in a new market and has decide to focus more on being a  commodity supplier and let other players take the risk. Is this the wrong way to do it? I suspect not specially so when considering the indebtedness of its shareholders.

In his report on TAF, Onno Van Bekkum postulated a vision for Fonterra in which it renewed its cooperative staus by rejecting TAF, and formed allianzes with commodity producer  cooperatives in other countries in which to leverage negotiations with brand distributors such as Nestle.
This would possibly fit in nicely with what Grumpy has illuminated in respect to Fonterras position, the main difference I see is Fonterra has rejected cooperative principles thus foregoing opportunity to make allianzes with cooperatives yet to form say in African countries, and in doing so choosing to negotiate relationships with Nestle, supermarkets et al. solo.

Take the horse meat problems
Here we have private slaughter houses, private meat traders, private frozen food producers and private supermarkets.
Would there be a lesser chance of this happening if there was a co op in the loop. Reading the press, the missing voice seems to be the farmers, i.e. farm suppliers of what people thought the product was. No one seems to sure where the meat (when thinking it was beef) had come from... The art of the European meat trader....
By some accounts the wrong type has beeen a problem for years, and going back to intervention days, one never knew what you were going to get. It didn't matter so much as it ended up canned as food aid within Europe (beggars can't be choosers) or export (Africa or central America (out of sight ..... ) at prices that crippled what local producers there were..
Any one for a bit of what looks like beef flank?
on the implementation of Title II of Regulation (EC) No 1760/2000 of the
European Parliament and of the Council establishing a system for the identification and
registration of bovine animals and regarding the labelling of beef and beef products

It is a very good signal to us in NZ how precious and FRAGILE our "clean green" image is.  It can all be gone in a flash (as anybody who has experienced life will tell you.)  Our NZ "greedy bastards" have been ruthlessly exploiting the tireless work in NZ of environmentalists, Maori, outdoors people, community minded people (all the people who love this country and see it as their beautiful home, NOT as a commodity to be sold for what ever they can get on the day).
If we want to be wealthy (really wealthy, not wealthy but dying or dead (think Steve Jobs)), then we need to protect our boarders, progress towards a completely organic farming culture and become real (not just for marketing perposes) environmentalists. If the drain is blocked,  air freshener is not going to stop the stench of raw sewage.
The world isn't interested in our poisonous pink slime, no matter the ad campaigns  of glaciers and inspirational music. People imagine that we can do any indecency and get away with it because we are "MIddle Earth". Nope, we are NOT, we are Aotearoa and we must respect, with our hearts, this land that is our Mother/Father.

This is why you have to protect and defend what you have (or had)
Try this for Government Authorised Pollution
An example of how Governments buckle at the knees.
When the chips are down and money talks it happens.
Could this happen in New Zealand?
Mount Todd gold miner Vista Gold can pump (discharge) contaminated water into river. Under the discharge licence, Vista Gold will ONLY be allowed to release water from massive holding ponds when the Edith River is flowing at a sufficient rate. Miner set to pump waste water into river system. Pumping mine waste water into river wins support Map: Katherine 0850 Mining company Vista Gold has been given the go-ahead to discharge water contaminated with toxic metals into the Edith River in the Northern Territory.
The company wants to reopen the Mount Todd mine, about 50 kilometres north of Katherine, but must first empty three retention ponds filled with water containing cadmium and copper. It needs to empty the ponds in order to begin operations.

Iconoclast - Interesting article and mentality. Uncontrolled discharge or controlled discharge have been interpreted as having different effects.
Amount of chemicals being released would be the same by volume going downstream whether controlled or uncontrolled.

mist - at the time these products were released testing didn't show residues up in milk.  The reason for the difference of 'then' and 'now' is due to more sensitive testing being developed by the USA. Before they were testing for parts per million, now parts per billion.
As a Fonterra shareholder I am rather dismayed at the complete c..k up in the handling of the PR over this.  And especially dismayed that Fonterra has resigned their 'favourite' PR firm for another five years, even if it is 'with a twist'.
The question I have is: What caused Ballance to stop recommending it in 2010 and stop selling it in July 2012?  This is before Fonterra started tested using the new testing regime in September.