Illegal export claims hit Kiwi

By PHILIPPA STEVENSON agricultural editor

Kiwi Dairies is tightly implicated in the dairy industry "Powdergate" scandal after a trail of allegedly illegally exported products worth tens of millions of dollars led to its Australian subsidiary Cottee.

The Business Herald has learned that 5000 tonnes of suspected Kiwi products were high-value milk proteins, worth between $10,000 and $20,000 a tonne on the world market.

The whole shipment could have returned $50 million or more depending on the mix of products.

Milk proteins are used in chilled dairy foods, fresh and processed cheeses, beverages, baked goods, diet and sports nutrition products.

Yesterday, Kiwi chairman Greg Gent said an inquiry suggested that the gross value of about 20 products supposedly exported illegally was $39 million.

He was confident the profit, or the margin between what the company could have earned for an illegal sale against returns from the Dairy Board, would be "modest."

Mr Gent has downplayed the scale of possible offending, saying 5000 tonnes was a small part of Kiwi's annual production, which in the 1999-2000 season was more than 280,000 tonnes.

Turnover last year was $2.5 billion.

Industry sources suggested the aim of any illegal exporting would be to cherry-pick the top end of the milk protein market, earning the lawbreaker a premium and saving it Dairy Board exporting costs.

The rest of New Zealand's output, pooled for export by the board, would then be forced into the lower price range.

"It could be called stealing from a [pooling] system that you signed up to," said one source.

The alleged breaches, occurring in the leadup to the formation by Kiwi and NZ Dairy Group of the country's biggest company, the $12 billion Fonterra, have caused uproar in the industry.

They have raised speculation that Kiwi used ill-gotten gains to bolster its bottom line while it was comparing balance sheets with Dairy Group during last year's merger talks.

A key point in the protracted process came when Kiwi - hailed as something of an economic miracle - trumped Dairy Group's payout to farmers for the first time.

The two companies finally clinched a deal when their respective valuations came out roughly equal.

It is understood that Mexico was the final destination of most, if not all, the milk protein possibly exported without a Dairy Board licence and in breach of Dairy Industry Act certification and labelling requirements.

Cottee Dairy Products, a Sydney-based global dairy product trader specialising in the high-paying nutraceutical market, is understood to have been a staging post between New Zealand and Mexico.

Mr Gent said the issue remained whether Kiwi knew the product would be exported after it was sold to another New Zealand firm.

Manufacturers are entitled to sell dairy products on the local market.

Mr Gent said it was not established that Kiwi had broken the law or did so alone.

"Where the water gets a bit murky is that it appears Cottee bought product off a number of sources out of New Zealand other than Kiwi, although the greatest volume has come through Kiwi."

The Business Herald understands a small amount of Dairy Group product is also under investigation.

A Ministry of Agriculture inquiry into the claims could end in prosecution but penalties are minor - up to $400 a person or $2000 for a company under the Dairy Board Act, and $20,000 under the Dairy Industry Act.

Political fallout is likely to be greater. Sources said Powdergate was unlikely to destabilise the industry merger, due to be consummated on October 24 with the formal launch of Fonterra.

Proven charges were more likely to cause heads to roll, but just how high up the Kiwi ladder was the key question.

Former chief executive Craig Norgate holds the same position at Fonterra, and several Kiwi directors are on the Fonterra board, including Mr Gent as deputy chairman.

MAF acting Director-General Larry Fergusson said two investigators, with support from other staff, were working on the high-priority inquiry. He could not give a completion date.