DCD safe, but Fonterra botched 'optics'
In politics and corporate public relations, people talk a lot about "the optics". The optics are the way things look, and Fonterra has a big optics problem right now.
In 2008, no-one seems to dispute that the Chinese Government delayed public disclosure of the SanLu melamine milk scandal until after the Beijing Olympics.
Fonterra was a shareholder in SanLu, but it didn't control the situation.
There is plenty of evidence that Fonterra urged disclosure and behaved as both a good corporate citizen and as a corporate concerned for the value of its investments and reputation.
Killing the SanLu brand cost Fonterra $220 million in write-downs. Try explaining that to a cowshed full of cockies.
Yet if lessons were really learnt then, how did the DCD withdrawal become such a balls-up?
Look at the optics.
About September last year, traces of dicyandiamide - sounds bad already - were discovered at tiny, harmless quantities in milk powder, but because there's no international standard for DCD, zero is currently the only acceptable standard. Something had to be done.
That was two months before the wildly successful Fonterra Shareholders Fund float, the largest event on the NZX for aeons, the only listing for a generation to give investors a decent stag, and the product of tortuous arm-twisting over many years to get farmer agreement. It had to list well.
The units were issued at $5.50, listed above $6.60, and were close to their highest at $7.23 on Friday. Probably thanks to DCD, they had slipped to $7.01 yesterday.
That doesn't necessarily matter. Any dip represents a buying opportunity, just as long as there's no product ban imposed in any significant Asian market.
"We wouldn't want to be in an ‘off the shelf' situation," said Harbour Asset Management's Andrew Bascand. So far, so good, but it has been touch and go.
From the moment the Wall Street Journal published its online story "Is New Zealand Milk Safe?", the hare was running. Notwithstanding the factual reporting from Wellington by AP Dow Jones's Lucy Craymer, that headline was all it took to light a fire you'd think Fonterra could have seen coming months ago.
It didn't. To cynics and Fonterra's detractors, the optics of the DCD disclosure look like SanLu all over again.
Labour's Damien O'Connor latched on to that accusation, unleashing a furious, off-script response from Fonterra chief executive Theo Spierings, who all but accused the West Coast MP of economic treason by stirring up a food safety scare that didn't exist.
He was particularly affronted to be accused, in essence, of covering up a food scare to manipulate a share float.
"If you come with accusations like that you better come with some evidence," he thundered.
When Labour MPs discussed how hard to push on this, they will have weighed carefully the risk of being painted as economic vandals. With many businesses expecting a Labour election win next year, the optics of being ready to govern are more important than the optics of Opposition right now.
Spierings was equally angry because Fonterra's global leadership in product testing is one reason this affair happened at all.
When Fonterra found the DCD traces, it thought two things: if it's a public health risk, we pull the product immediately. If it's not, we talk to the suppliers about how to deal with it.
This was a typical collision of improved testing colliding with unco-ordinated global food regulation that requires new tests. DCD, after all, has been in use for 30 years and is a tool for reducing greenhouse gas emissions.
With no public safety risk, "we had a little bit of time", said Spierings. And because DCD is applied only in spring and autumn, it was effectively "withdrawn" from market for normal seasonal reasons over the summer.
By December, a Ministry of Primary Industries working group was in harness, which led to last week's product withdrawal by fertiliser companies Ravensdown and Ballance Agri-Nutrients.
If everything of this kind had to be disclosed publicly as a matter of course, the deluge would make not only Fonterra unmanageable, but almost every other food business, Spierings argues. "It would make a zoo."
The trouble is, this still feels like an issue that should have been foreseeable.
The fact there was no human health risk made it a no-brainer there was nothing material to disclose, even under the NZX Listing Rules that applied to the FSF prospectus.
And even if, in the back of people's minds was the thought that a nasty little food scare based on nothing would be unhelpful ahead of the November float, so what?
Being lucky and in the right isn't a reason to disclose something.
Fonterra's dilemma now is to make sure that everyone who matters believes that.