Bitter battles of the past flavoured milky fallout

By JIM EAGLES business editor

The origins of the Powdergate scandal lie in the nature of the old dairy industry, with its fiercely competitive rival companies presided over by a monopolistic and often bureaucratic Dairy Board.

If one company found a fresh product or a new market, it had to go to the board for approval.

Often it would simply pick up the opportunity itself, effectively requiring the innovator to share the benefits with the rest of the industry.

This left the aggressive marketers at the dairy companies frustrated by the bureaucratic process and annoyed at being deprived of the fruits of their enterprise. Because of this, virtually all the dairy companies circumvented the board from time to time. The system followed was often like that of the Powdergate investigation.

For example, a dairy company would sell some high-end product, quite legally, to an independent New Zealand middleman, who would on-sell it to an Australian firm, sometimes connected with the original dairy company.

It would be exported as something that did not require a Dairy Board permit, and the Australian company would then ship it to the world.

By last year, the practice of sidestepping the board had become so common - though it only ever involved a tiny proportion of industry output - that the companies themselves decided it was time it was stopped.

As part of the unification process, they agreed to stop exporting outside the spirit of rules.

The investigation into Powdergate found that Craig Norgate, when he was chief executive of Kiwi, gave specific instructions to shut down the operation that sold high-value products to Tauranga-based South Pacific Distributors, which on several occasions on-sold it to Kiwi's Australian subsidiaries, Cottee Dairy Products and Australasian Dairy Ingredients, who then exported it.

But it appears that the Australian employees were lax in following orders, and some product continued to be exported.

In April, Dairy Board staff discovered rennet casein from Kiwi's Maungaturoto factory in Mexico. In June they found milk protein concentrates from Kiwi's Hawera site.

Neither shipment appeared to have been sanctioned, and the board decided it was time for action.

This fanned fresh life into the dairy industry's traditional rivalries, which had been heightened with the appointment of Mr Norgate, not one of the Dairy Board candidates, to Fonterra's top job and by the success of Kiwi, once the junior partner, in the merging stakes with New Zealand Dairy Group.

Industry leaders - most of them must have presided over identical transactions over the years - bayed for blood.

Ironically, considering the tremors Powdergate has sent through the industry, it is by no means clear that the transactions involved a breach of the law. Legal opinion has indicated that Dairy Board approval may not have been required after all.

The Ministry of Agriculture and Forestry is continuing to investigate that. The re-exporting from Australia, under allegedly false labels, is being investigated by the Australian Quarantine Inspection Service.

If a prosecution does result, it is not likely to lead to massive penalties being imposed. The last time someone was prosecuted for mislabelling milk protein and exporting it without a permit, back in 1999, the fine was $330.

Whether there will be wider consequences for the industry remains to be seen.

Feature: Powdergate