Fonterra legal scrap risk to NZ: expert

French food giant Danone's legal action against Fonterra will cause uncertainty for investors and is more bad press for both the dairy co-operative and New Zealand, says a market commentator.

The Paris-based company said yesterday it had begun a claim in the High Court at Auckland against Fonterra together with arbitration proceedings in Singapore, to get compensation after it recalled infant formula products in eight countries during last year's botulism scare.

Danone, which is the parent company of infant formula manufacturer Nutricia, last year put the cost of the recall at €350 million ($576 million) and wants compensation for both the losses it suffered and the harm caused to its reputation.

Fonterra caused panic in August last year after it suspected that 38 tonnes of whey protein had been contaminated with a botulism-causing bacterium.

The issue was later found to be a false alarm but not before Fonterra customers, including Nutricia, had recalled baby formula products. A spokeswoman for the French company would not say how much compensation was being sought and said the total amount of damages would be worked out at the time of the trial.

But she said the affair had caused "serious damage to the Danone business".

"Danone anticipates a free-cash-flow loss of 300 million for the fiscal year 2013. Secondly, the recall had a significant impact in terms of brand reputation and Danone will be seeking a fair compensation for that," she said.

Fonterra said it was "disappointed" with the action and will "vigorously defend any proceedings".

Fonterra chief executive Theo Spierings said in December that he expected any court action would show it had no liability in its contract.

Fonterra has made a $14 million loss provision for the 2012/13 financial year to take into account the impact of the botulism scare.

ANZ rural economist Conn Williams said quite a few people thought this was "inadequate" when Danone said they'd lost 350 millon in the recall. While eight Fonterra customers recalled products during the scare last August, Fonterra had reached commercial agreements with all but Danone.

Hamilton Hindin Greene director Grant Williamson said while Fonterra seemed confident in its ability to defend the action, it would create uncertainty for investors.

Units in the Fonterra Shareholders' Fund fell 1.71 per cent yesterday to $5.76.

Williamson said the court action was not unexpected but that the negative press wasn't good for the company or New Zealand's reputation.

"Fonterra is our largest company, it's our biggest exporter so we don't really want to see this ... the reputational damage can have a pretty serious effect on New Zealand overall," he said.

The country's reputation as a safe source of dairy was tarnished during the botulism fiasco particularly in China where news of the scare only being a false alarm was slow to spread.

Simon Page, managing director of New Zealand infant formula exporter Biopure Health, said the scare left some of his Chinese customers confused about what to trust.

"Sales in our China shops have recovered after the botulism scare because I visited each of them and spent a lot of time personally interacting with customers and explaining that our brands were not affected and were safe," Page said.

"Sadly, many told me that after the reporting of the botulism scare across official Chinese media, they are now completely confused about what to trust and the unconditional trust they used to have on anything 'made in NZ' is gone."

Danone also said it would terminate its existing supply contract with Fonterra and make "any further collaboration contingent on a commitment by its supplier to full transparency and compliance with the cutting-edge food safety procedures applied to all products supplied".

Director of equity research at Woodward Partners David Stanley said while Danone was a "very important customer" for Fonterra, it represented only a few per cent of its revenues.

"I'm not sure (of) the value of the supply contact but it would be fair to say in the context of (Fonterra's) total sales it's relatively small," Stanley said. "We're talking a few per cent at most of Fonterra's revenues ... Danone is obviously a very large and important customer but it's not like we're talking 10 or 20 per cent of sales."