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The News For New Zealand's Fonterra Gets Worse

Fonterra is not the only company to have problems of this nature in China. Yum! Brands (YUM) has had problems with its KFC unit. KFC is a very successful brand in China, accounting for 40% of YUM's profit in China. Last December it was alleged the company was using unapproved hormones and antibiotics in its chicken, which caused a serious backlash that is still hurting the company today. Same-store sales for KFC China were down double digits in July.

The reaction in the stock price after the second contamination has been minimal, dropping 4 cents, or about 2/3rd of a percent, generally in line with the broad market.

Fonterra is not a holding in the iShares MSCI New Zealand Capped ETF (ENZL). In fact there are no agricultural companies represented in the fund. But the industry plays a large role in the country's economy, accounting for more than 15% of GDP.

Fonterra has 33 plants in New Zealand and does business in 140 countries, which sets an expectation that it could take several months to implement the necessary improvements in quality control. So it would not be a surprise if there was more bad news to come.

However, the fact is that China's and New Zealand's other trade partners need dairy products and Fonterra has them, which might be why the stock price has not tumbled.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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