A sales assistant taking down milk powder products which
were recalled by Fonterra last year. Photo by Reuters.
A long legal battle could ensue following French dairy
giant Danone's decision to launch legal action against Fonterra
over last year's botulism scare.
In a statement, the company said the incident illustrated
''serious failings'' on Fonterra's part in applying the
quality standards required in the food industry.
In August, Fonterra revealed 38 tonnes of whey protein, used
in a range of consumer products, might have been contaminated
with a botulism-causing bacterium.
News of the contamination, which turned out to be a false
alarm after further testing, received global media coverage.
Yesterday, Fonterra said it would ''vigorously defend'' any
Danone - which is the parent company of infant formula
manufacturer Nutricia - put the cost of last year's recall at
350 million ($575 million) when it announced its
third-quarter results, while Fonterra recognised a contingent
liability of just $14 million in its own accounts.
Danone said it was terminating its supply contract with
Fonterra and making 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 to it.
It was initiating proceedings in the High Court in New
Zealand, as well as arbitration proceedings in Singapore,
''to bring all facts to light and to obtain compensation for
Asked the amount of compensation the firm was seeking, a
spokeswoman 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. The total damages will
be quantified at the time of the trial,'' she said.
In a subsequent statement, Fonterra said it had been in
ongoing commercial discussions with Danone and it was
disappointed the negotiations had resulted in legal action.
It would now work through the detail of Danone's claims. It
continued to be confident in its position and would
''vigorously'' defend any proceedings.''
Fonterra stands by its track record of having world-class
food safety and quality standards, quality systems, and
robust testing regimes across all its manufacturing
facilities,'' it said.
Forsyth Barr broker Andrew Rooney said the legal action had
two sides to it - the loss of a customer and the liability to
The loss of a customer was not considered a major issue, as
the resultant product would be put into the market and traded
through the GlobalDairyTrade platform. There might be a loss
in pricing premium but that would depend on the demand and
the availability of product from other producers, Mr Rooney
The liability was difficult to quantify without knowing the
details of the insurance liability arrangements and the legal
standing of the claim and defence.
There were some unknown provisions in Fonterra's full-year
2014 guidance and Forsyth Barr deduced they might be to cover
such action. It was possible the legal debate might draw out
for months, if not years, he said.
There was also the ''negative sentiment'' that surrounded
such events, regardless of the facts, and there was already a
drop off in unit pricing yesterday, he said.
Craigs Investment Partners broker Peter McIntyre said the
announcement was a continuation of a series of ''bad news''
following the contamination scare.
Fonterra Shareholders Fund units opened at $5.86 yesterday
and reached a low of $5.70. They were trading at $5.76.
Mr McIntyre believed it was probably making investors ''a
little bit wary''. There was uncertainty as to what the
outcome would be or what the timeframe would be, he said.
Additional reporting by The New Zealand Herald
Dollar eases on news of action against
The New Zealand dollar eased slightly against the US currency
yesterday, following news French food giant Danone is taking
court action against Fonterra in the wake of the botulism
But also, the US dollar gained after the release of minutes
of the Federal Reserve's meeting in December when
policymakers decided to trim the US central bank's purchase
of bonds to prop economic growth.
Across the Tasman, the Australian dollar fell after gains in
the US dollar offset positive local retail data. The US
dollar was also helped by some good US employment data.
Craigs Investment Partners broker Greg Easton said the kiwi
was still ''travelling well'' against the Australian currency
at A93c yesterday.
The kiwi was US83.19c, falling to US82.53c after the Fonterra
announcement, before rebounding. During the last four days,
the kiwi had dropped slightly in value against the greenback.
''When a company [Fonterra] makes up more than 20% of the
country's economy, and a large customer is taking legal
action, there will be an impact,'' Mr Easton said.
The ADP National Employment Report showed US private
employers added a higher-than-expected 238,000 jobs in
December, the strongest increase in 13 months.
The report also revised November's job gains higher, just two
days before the Government's closely watched monthly non-farm
payrolls report. The data is more comprehensive as it
includes both public and private sector employment.
Investors are looking to the non-farm report to assess
whether the pace and size of the Fed's scaling back of its
bond buyer either quickens or increases at a meeting later
Economists polled by Reuters have forecast 196,000 non-farms
were added to the US economy in December.