The big coverup? The DCD residue debacle
The finding of DCD residue in Fonterra milk is a public relations nightmare for the company and New Zealand's wider dairy industry. Andrea Fox asks why it went so wrong.
In the avalanche of words triggered by the DCD residue-in-milk storm - including the devastating line "is New Zealand milk safe?" - two words have repeatedly surfaced: "unexpected" and "coverup".
Not nearly as often as the phrase "there is no food safety risk", but enough to be noticed in the eight days since the Government announcement that traces of the nitrate inhibiting pasture agrichemical were found last year in Fonterra milk products.
"Unexpected" has been the pet word of the Ministry for Primary Industries in describing Fonterra's September discovery of low residues of the biodegradable DCD, or dicyandiamide, in its first-ever testing for the chemical in the seven years the product has been commercially available to farmers.
"Unexpected" propelled government officials into a secret huddle with scientists for nearly three months, after being briefed by Fonterra more than a month after the DCD discovery.
Also "unexpected", says ministry deputy director-general Carol Barnao, was the strength of public and overseas reaction, when on January 24, more than four months after Fonterra's testing, her ministry told the world about it.
Certainly "unexpected" was the DCD news to the financial markets, whose Kiwi and overseas investors on November 30 rushed to buy $525 million of listed units in Fonterra's hungrily anticipated stock market launch.
The question is did Fonterra, New Zealand's biggest company, and the world's leading dairy exporter, stall on informing the Government of its DCD finding so as not to suppress investors' appetite for the launch?
Chief executive Theo Spierings denies any hint of a coverup and says closing one of its Australian factories in the week before the units' launch was "much more material" and was disclosed.
He rejects criticism from some market analysts that the DCD issue should also have been in the prospectus, saying the market would "have reacted heavily" if that was the case.
Yesterday Fonterra's unit price was $6.95, down from $7.49 on January 16, and $7.30 on the day of the public announcement about DCD.
The Financial Markets Authority has said it is "keeping this issue under inquiry but has not commenced an investigation under the Securities Act".
NZX said it "did not comment on regulatory matters relating to specific companies".
For the rest of the $14 billion New Zealand dairy industry, the announcement was also "unexpected".
Despite being members of the Dairy Companies Association, which joined the ministry's DCD working group, independent dairy companies say they only learned about the DCD discovery when the public did.
It is from these rivals that the "coverup" claim has come.
Left out of the loop and caught unawares by the DCD public announcement, smaller industry players had no time to isolate and test their own product made around the narrow pasture application time period under scrutiny. They have product orders worth millions of dollars at sea or at overseas wharves that they claim customers are now leery of accepting.
One industry insider, who declined to be identified, said while Fonterra was bearing the brunt of the trade reputation risk, the ministry was complicit in keeping the DCD discovery quiet.
The Government had a responsibility to an important economic industry to inform it of potential issues, he said.
"DCD is absolutely no food safety risk but perception is everything with food."
New Zealand had already been "a bit tainted" by Fonterra's involvement in the Chinese SanLu company, spotlighted in the 2008 melamine baby food poisoning scandal, he said.
"It [DCD] was nothing but it's become something.
"Just a sniff of a coverup or cute and you're gone."
China's panic over the DCD announcement was understandable.
Since the 2008 infant formula tragedy, New Zealand has become the supplier of 80 per cent of China's foreign dairy imports. In its search for safe product for its 1.3 billion people, China has become Fonterra's biggest customer, with New Zealand infant formula flying off the shelves. China and Asia are also important markets for other Kiwi dairy processors.
But as the secret DCD working group of government and Fonterra officials has learned to New Zealand's cost, saying something over and over again doesn't blunt the sharp edge of perception.
The mantra that "New Zealand milk is safe" was lost in the viral media hubbub that followed an announcement no trading partner appears to have been warned was coming.
Also under fire for keeping secrets from the dairy industry is the Dairy Companies Association, chaired by Fonterra director Malcolm Bailey.
"We can no longer trust our industry body," said one player.
Bailey refused to comment.
The blame game thrives in a crisis and that's Fonterra chief executive Theo Spierings' word for the markets' reaction of the past week. Predictably, he is blaming the media for the international consumer panic.
But who is to blame isn't the real issue here. Transparency is.
If DCD is so safe, and the residue found so minute as we have been told over and over in recent days, why take four months to reveal its discovery?
There are no international standards for DCD residues in food because, according to the ministry's Barnao, it has never been considered a food safety risk.
While it was Fonterra's first time testing, other pasture residue safety tests have been conducted in 2003 and 2009.
The ministry tested raw milk in 2010 for DCD and found no traces. Less than 5 per cent of Kiwi farmers have used DCD, Barnao says.
But food regulators are demanding increasingly sensitive and rigorous testing for residues, with some countries now having zero tolerance to "detected, unexpected residues", she says.
For Fonterra's Spierings the issue is more personal.
The Dutchman, in the job coming up 18 months and "passionate" about the industry, is completely confident DCD is not a food safety issue and says the residues found last year were 100 times lower than levels accepted in Europe.
So why did he tell the Government?
"Now we come to the core of this matter. Do I accept in New Zealand, long term, milk with traces of material which do not belong in milk? My answer is no.
"So we said to MPI [the ministry] we want you to start working with the fertiliser companies and we are willing to help."
Ravensdown and Ballance Agri- Nutrients have withdrawn the product from the market.
Oddly, in an explanatory notice dated January 27 to primary industry participants, the ministry said "a major reason" for announcing the DCD issue and supporting the withdrawal of fertiliser containing DCD when there was no food safety issue, was "because the environmental benefits of the product were such that its absence from the market would have attracted public attention".
Meanwhile, Spierings is eerily replaying the stance of his predecessor, Andrew Ferrier, around Fonterra's failure to front foot it in the disastrous melamine scandal involving SanLu in which Fonterra had a 43 per cent stake and kissed $200m goodbye when it went bust. Spierings is also taking the moral high ground.
Despite the tsunami of panicked questions over the safety of New Zealand's milk from Fonterra's uber- food scare sensitive Asian and Chinese customers, he says no damage has been done and no borders closed to Kiwi product.
Only in China was New Zealand product taken off the shelves, to be reinstated the next day, he says.
Nor does he accept that Fonterra, 90 per cent of the New Zealand dairy industry, created its own public relations disaster in not publicly fronting the DCD issue until a Wall Street Journal online reporter on January 25 asked: "Is New Zealand milk safe?", sparking a social media feeding frenzy.
"We could have, for our own benefit, gone out and been a saviour of the day and got all the glory for ourselves. But what was important for us is that fertiliser is used by the whole primary sector," Spierings says.
Fonterra knew there was no food safety risk but "raising a red flag" last year would have created an emotional issue with no answers and severe consequences in Asian markets, he says.
But haven't there been consequences from hanging back (again) anyway?
"We cannot measure them yet.
"I honestly believe what we have done for this country and how we have liaised with our customers, consumers and countries, it is to our credit.
"Overseas they have appreciated what we have been doing - maybe not at home so much.
"My key concern was customers and consumers, and social media - to make sure that [emotion] has died down. The next phase for us is logistics."
September 2012 - Fonterra finds traces of DCD in product test samples.
November - Fonterra advises Ministry for Primary Industries of finding.
Early November - Ministry forms working group to validate Fonterra tests.
January 24 - Ministry announces DCD product withdrawn from market by fertiliser companies.
January 25 - Wall Street Journal asks "is New Zealand milk safe".
January 26 - Fonterra chief executive Theo Spierings holds "crisis team meeting" as Asian consumers panic.
January 27 - Spierings issues calming statement.
DCD is dicyandiamide.
Used by 5 per cent of dairy farmers.
Applied to pasture as nitrate leaching inhibitor in autumn and spring.
No international standards for residues in milk.
No residues expected in meat.
The Dominion Post