China scandal hits Fonterra hard

PAYOUT DETAILS: Fonterra CEO Andrew Ferrier (L) and chairman Henry van der Heyden at today's press conference.
PAYOUT DETAILS: Fonterra CEO Andrew Ferrier (L) and chairman Henry van der Heyden at today's press conference.

Fonterra has taken a massive $139 million hit on the value of its San Lu business in China, following the contaminated milk crisis.

The cooperative says the San Lu brand has been destroyed.

And Fonterra is reacting with shock to news from state media in China that the San Lu Group, 43 percent owned by Fonterra began receiving complaints of sick children as early as last December.

Previously, Fonterra had said San Lu first started receiving complaints in March.

Chairman Henry van der Heyden expressed surprise.

"I would be absolutely disgusted and appalled if information was held back," he told a crowded news conference in Auckland.

"What has happened here is a criminal event."

CEO Andrew Ferrier said he had no indications that San Lu had been lying to them.

"Clearly there are very painful lessons here for Fonterra," he said.

He thought they had a reasonably good structure in China.

If one partner did not tell the truth to the other "you have a critical breakdown in that relationship".

He added later that "Fonterra is gun shy over the whole thing".

He admitted that people deeper down in their organisation in China could have been "fooling us".

In a statement to farmer owners released ahead of the press conference, Mr van der Heyden said the scale of the tragedy had been "truly shocking".

He said China would remain core to their growth strategy.

"As a direct consequence of the criminal contamination of milk in China, Fonterra has recognised an impairment charge of $139 million against the carrying value of its investment in San Lu."

This reflected the cost of product recall and the loss of value for the San Lu brand.

"Following this impairment charge, Fonterra's best estimate at this point of time of the book value of its investment in San Lu is approximately $62 million."

Mr Ferrier said the San Lu brand could not be saved but the company assets perhaps could.

"San Lu has been damaged very badly by this tragedy. It’s hard to say at these early days how it can be re-constructed."

Mr van der Heyden rejected claims the scandal amounted to a failure of risk management in Fonterra.

"We went at length around milk quality, but if people carry out a criminal act, how can you prevent that?"


Fonterra announced a final payout of $7.90 a kilogram of milk solids for the last season. This is the number they predicted in May.

Fonterra lowered the payout forecast for the current season to $6.60.

Mr van der Heyden said prices have fallen away from last year's record highs.

"High prices have dampened global consumer demand and, at the same time, have encouraged production increases in exporting regions around the world,"



Fairfax Media