New Zealand Probes Fonterra's Handling of Food-Safety Scare

   By Rebecca Howard 
 

WELLINGTON, New Zealand--Government officials in New Zealand began poring over documents held by Fonterra Cooperative Group Ltd., as criticism continued to mount over the world's biggest dairy exporter's handling of a tainted milk scare.

The probe began as lawmakers weighed the economic impact of bans imposed by China and Russia on some milk products following a warning by Fonterra that it had sold products potentially containing harmful bacteria. Dairy accounts for around a quarter of New Zealand's exports, and the fallout risks harming the country's hard-won reputation as a safe supplier of food.

Underscoring those concerns, the government sent officials to Fonterra's offices in Auckland and Melbourne to find out what management knew in advance of problems with its exports and to track the tainted products. Aides of Prime Minister John Key said the move to access a private company's office to verify information was unprecedented under his government.

A key question for investigators is why Fonterra waited more than 48 hours to inform lawmakers of possible contamination.

"I can't explain that gap in time," Mr. Key said. "That is one of the very real issues that needs to be looked at."

The prime minister also noted that information provided by Fonterra changed several times over the initial two days.

Fonterra has apologized for the food scare, which began Saturday when it said some of its exported whey protein products may contain Clostridium botulinum, a bacteria that can cause severe and even deadly food poisoning.

Fonterra produced the whey protein for use in infant formula and other products in May 2012. The issue was not identified until March and intensive testing was then carried out to isolate the specific bacteria. On Wednesday, tests indicated the potential presence of Clostridium botulinum, which can cause botulism. However, it took a further two days to inform the government.

Fonterra confirmed that the Ministry of Primary Industries, or MPI, is studying data related to the contamination scare. Ministry officials have also inspected the manufacturing plant where the contamination is thought to have occurred.

"We have been working very, very closely with them," Gary Romano, a company spokesman, told reporters.

According to the company, the contamination problem was due to a pipe that hadn't been sufficiently cleaned and which has since been destroyed.

Finance Minister Bill English said the government is assessing the impact of the food-safety scare on the economy, which leans heavily on agriculture exports like milk and has outperformed many of its developed peers.

To date, China has banned whey protein products and base powder formula used to manufacture infant formula and Russia has reportedly banned all New Zealand dairy products. Products have been recalled in several countries including China, New Zealand and Malaysia.

Although China is a key market for New Zealand, taking around a quarter of its dairy exports, Mr. English said those products affected by the ban were worth only 125 million New Zealand dollars (US$112 million) a year, or around 1% of dairy shipments.

"At this stage there is no indication the issue has escalated to the point where it could have significant impact," Mr. English told reporters.

Much will depend on how international customers respond to the scare, and whether they look to replace New Zealand milk products with those of rival suppliers like Switzerland and the Netherlands. Mr. English said the outcome of the main price-setting auction for milk, known as GlobalDairyTrade, later Tuesday would be a key test of customer demand.

Still, lawmakers signaled their frustration at how Fonterra, a cooperative of 10,500 individual farmers that is New Zealand's only global brand, had handled its third quality issue with milk products in recent years.

Fonterra owned a stake in a company involved in the melamine scandal in China in 2008. Earlier this year, the company acknowledged finding traces of the chemical dicyandiamide, or DCD, in its milk powder. Fonterra at the time said the government advised it the low levels found weren't a safety concern to humans.

"Fonterra has let us down--its strategic communications have been hugely lacking," said David Shearer, leader of New Zealand's opposition Labour Party. "This issue is bigger than politics, but Fonterra is not bigger than parliament."

A spokesman for the Financial Market Authority also said it has concerns about how long it took Fonterra to disclose the information about the current food safety scare to the share market-- where it has a listed fund--and was seeking a response from the company.

The scare risks straining relations between Fonterra and companies that rely on its milk supply for their own products.

Fonterra said it has informed eight of its customers about the possible contamination. Nutricia New Zealand Ltd., a unit of Paris-based Danone SA (BN.FR), Coca-Cola China, a unit of U.S.-based Coca-Cola Co. (KO), and Danone Dumex (Malaysia) Sdn. Bhd. all announced precautionary recalls over the weekend.

On Tuesday, China's national quality watchdog asked a Chinese arm of the U.S.-based Abbott Laboratories (ABT) to recall two infant formula products.

Regarding possible compensation to these and other customers, Fonterra said this hasn't yet been discussed. Nutricia declined to comment on whether it would seek compensation.

-Write to Rebecca Howard at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires