Milk powder scare will cause long term disruption

It may be a statement of the obvious, but the effects of Fonterra’s botulism scare will last much longer than originally hoped or imagined. Its impact on New Zealand’s international trade reputation gives the impression of being more disastrous than an outbreak of foot and mouth disease, always assumed to be the biggest disaster that could possibly happen.

 

Economically there is no comparison between the two, because the botulism that wasn’t has initially done no more than cause infant formula manufacturers a loss of business. There has been no apparent impact on dairy payouts or even global auction prices. Fonterra appears to be pretending the whole saga wasn’t even its fault, if its reaction to Danone’s damages claim is any guide.

 

In contrast FMD would cause enormous loss of livestock and the economic devastation would be vast. But, as can be seen from the experience of the UK, Europe and South American countries where it lies dormant and erupts at intervals, there is life after FMD. It poses no danger to human health, but enormous economic and physical upheaval at the time.

 

Fonterra, unwittingly because of its ham-fisted management of the botulism scare, has in one swift move caused untold damage to New Zealand’s reputation for food safety. There is nothing anyone can do to recover that reputation quickly, regardless of conversations between the Prime Minister and Chinese President, apologies from Fonterra delegations, or more stringent inspection procedures.

 

These are all akin to shutting the stable door after the horse has bolted. Only time and continued avoidance of repeat disasters can repair the damage.

 

The effect on New Zealand’s economy is unlikely to be particularly big in the short term, merely falling disproportionately on a few infant formula manufacturers. But there has already been a significant decline in sales of New Zealand dairy based products in China, trade with Sri Lanka has stumbled, and Russia’s reaction has pushed a free trade agreement way off the agenda. It looks as if Putin didn’t even want to talk to John Key at this year’s APEC talks.

 

Apart from the potential damages claims, Fonterra appears to have got off almost scot free from what can only be judged as a monumental cock-up. In war zones the casualties would be termed peripheral damage. That must be how the infant formula manufacturers and possibly exporters of meat to Russia are feeling about the whole debacle.

 

From an academic point of view the Fonterra and ministerial enquiries will hopefully reach a conclusion about what actually happened. However the key events appear to have been the decision to get AgResearch involved in carrying out tests in June which the crown research institute wasn’t fully qualified to conduct; then there was the decision to blow the whistle without cross-checking AgResearch’s initial results.

 

It will be interesting to see if any responsibility is attributed to the major BCG inspired restructure within Fonterra which has seen large numbers of senior and middle management leaving the company or having to reapply for their jobs. There is no doubt such restructures achieve financial objectives, once the new structure settles down, but they involve much unrest and the loss of institutional capital.

 

With no knowledge of the inner workings of Fonterra, this can only be speculation, but it must be asked if the new broom, in the form of Theo Spierings with support from BCG, has generated a regime where senior managers are either afraid or lack the knowledge to speak out.

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Tags: AgResearch, Boston Consulting Group, botulism, China, Danone, Foot and Mouth Disease, infant milk formula, John Key, Russia, Sri Lanka, Theo Spierings, Vladimir Putin