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Current as of 25/04/17 07:20AM NZST
NZ Herald business editor at large

Liam Dann: One dirty pipe, so much damage

Food safety is the hottest media topic in China and this scare will get the full tabloid treatment.

Fonterra's efforts to launch its infant formula brand in China have twice been ruined by food safety issues. Photo / Richard Robinson
Fonterra's efforts to launch its infant formula brand in China have twice been ruined by food safety issues. Photo / Richard Robinson

It is extremely worrying how vulnerable New Zealand's economy remains to isolated issues of food safety. One dirty pipe at a dairy factory threatens to seriously undermine New Zealand's reputation as an exporter of safe and pure foods.

Just last week, Fonterra chiefs were economic heroes, upping their payout to farmers and adding an extra $3.5 billion to the New Zealand economy.

How quickly fortunes can change. Clipping the ticket on bulk milk powder prices and a falling dollar is one thing, developing a high-value global brands business is another.

Fonterra has now twice tried to launch its own infant formula brand in China, only to have its efforts ruined by food safety issues.

In 2008 it was as part of a joint venture with China's Sanlu. At that time, criminal negligence in the Chinese supply chain cost the lives of infants. Now, this safety scare comes just as it has launched its own Anmum brand infant formula in the Chinese market.

While the cause of this problem is not malicious, and no babies we know of are sick, the problem this time belongs entirely to Fonterra.

It is a devastating blow and so much remains unanswered.

What went wrong at an engineering level? And why did it take so long to investigate? Why so long to go public?

Even allowing for due process and getting all the ducks in line, why would you put out a press release at 12.06am on Saturday morning? That's 8.06pm on Friday night in China, so not timed for them either. Surely Fonterra didn't think it could skip the news cycle with this one?

Even then, details about which products are at risk seemed sketchy and drip-fed.

Perhaps they just don't know for sure. But if that's the case then it hardly marries with the image of the "grass to plate", high-tech, super-visible supply chain that New Zealand agriculture trumpets to the world.

One dirty pipe. It might have done less damage if it had exploded.

Unless we - and more specifically Fonterra's consumers and its farmer shareholders - get some good answers to these questions, then senior heads at Fonterra will have to roll.

The farmers are not happy. They know how serious this is. The Government is not happy either. Fonterra didn't tell the Ministry of Primary Industries about this until midday on Friday - at least two days after they confirmed they had a serious issue, months after they identified a potential problem.

Trade Minister Tim Groser will most likely have to follow Fonterra chief Theo Spiering to China to reassure our largest export market that New Zealand food products are safe.

The Chinese media will not hold back and already this is front page news there. Food safety - as is now very clear to anyone in the New Zealand food industry - is the hottest media topic in China.

This will get the full treatment from China's aggressive tabloid media as well as the more measured broadsheets. Every detail of this and every hint of possible scandal around this issue will be printed in Mandarin and then repeated and potentially exaggerated on Weibo - China's version of Twitter.

Middle-class Chinese consumers are increasingly literate in the names of the multinationals that produce their food. They are following food safety stories so closely that they don't forget the issues that have gone before. So there is a cumulative problem for Fonterra and New Zealand.

This is the third infant formula issue Fonterra has been involved with. There was the Sanlu melamine scandal of 2008 and the DCD issue here in January when low levels of a fertiliser chemical showed up in some New Zealand milk powder. The levels were deemed safe and use of DCD was abandoned here. But that was big news in China too. Chinese officials are understood to have wanted a recall then, but Fonterra didn't act because the science was on its side. The Chinese will not forget that.

Now this. Botulism - the word alone is enough to strike fear into the hearts of new parents. There are numerous small New Zealand exporters who will pay a price for this scare. Some are tiny businesses that can ill-afford to soak up the days, weeks or months of revenue damage it may do.

Others are mid-level players such as newly listed dairy producer Synlait. Fonterra as a whole is big enough to ride out the storm but the Fonterra Brands business will be counting a huge cost. All the time and effort and money invested in the Anmum brand is at serious risk.

Worse still is that Fonterra is picking up a negative global reputation on food safety that is probably undeserved but will be hard to shake.

Fonterra has had a run of bad luck but it has not covered itself in glory with its official response to any of these issues.

With luck and good management, no one - especially no babies - will be harmed by this incident. Certainly the furore about New Zealand dairy will die down and bulk dairy exports to China will resume. The macro-economic effect will hopefully not be much more than a ripple.

But the opportunity cost to New Zealand is huge and sets back, once again, the country's long and painfully slow march to shift its food exports up the value chain.

Those involved in the farming sector have always lived with the risk and knowledge that a bio-security issue such as a foot-and-mouth outbreak could devastate the national accounts and leave our most valuable industry in tatters.

All the best quality controls and brand management can't protect us from these vulnerabilities. It remains the big flaw in the otherwise historically successful idea that New Zealand can live primarily off the back of a sheep or a cow.

This is a warning to us all that New Zealand needs to keep pushing to diversify its economic interests beyond the farm gate.

On Twitter: @liamdann

Debate on this article is now closed.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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