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The News For New Zealand's Fonterra Gets Worse

Stocks in this article: ENZL YUM

NEW YORK ( TheStreet) -- At the beginning of August, New Zealand dairy co-operative Fonterra made global headlines when it disclosed that 38 tons of whey powder exported to China was contaminated with a bacteria that can cause botulism.

The contamination was blamed on a seldom-used but not sufficiently clean pipe through which the powder passed. Fortunately, there were no reported illnesses as most of the powder was isolated and recalled. However, the incident cast a negative light on Fonterra, which is the largest company in what is arguably New Zealand's most important industry.

The whey powder incident set off a series of steps taken by the company to improve quality control and damage control. As bad as the news seemed to be, shareholders have not panicked. After in initial knee-jerk reaction on Aug. 5, the stock is only down 2.95% versus a 0.74% drop for the benchmark NZ 50 Index. There are no Fonterra ADRs. U.S.-based investors interested in trading the stock need to do so directly in New Zealand.

Markets seemed to be moving on from the news as the company was hopefully putting it behind them. However, this week news broke of a second contamination.

This time it involved unacceptably high levels of nitrates in a 42-ton batch of milk powder headed for China. The health threat is that high levels of nitrates can prevent blood from properly oxygenating.

The milk powder was tested when it left New Zealand and had an acceptable nitrate level of 1.4-1.8 parts per million. When it arrived in China it was tested again and had a 2.4-2.8 parts per million nitrate level. The allowable limit is 2.0 parts per million.

Separately, news broke of problems in Sri Lanka. The company was found to be in contempt of court for violating a two-week ban on marketing and distribution of products under the Fonterra Brands Lanka label because of another suspected contamination in milk products and alleged misleading advertisements. The milk in Sri Lanka is believed to be contaminated with dicyandiamide, which is an agricultural chemical.

After the first incident came to light, CEO Theo Spierings said that "Fonterra will check, double check and triple check, if necessary" in the context of quality control. The second contamination actually occurred before the first contamination was made public. The Fonterra Web site has not been updated with specifics yet of the latest news or how the company intends improve its processes.

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