Tardy risk disclosure defended

MICHAEL BERRY AND ANDREA FOX
Last updated 08:53 31/01/2013

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Fonterra says major investors and market analysts are comfortable with its decision to keep its investigation into trace contaminants under wraps initially.

However, analysts and investors spoken to by The Press were divided over whether the diary giant was transparent enough, with one saying "it was not a good look". Another said Fonterra was tardy with its disclosure. Other milk exporters are also upset at Fonterra's approach.

Last week Ravensdown withdrew a product used on some Kiwi dairy farms to stop nitrate from fertiliser leaching into waterways because Fonterra had found minute traces of it in some of its milk.

Those traces of dicyandiamide (DCD) - well below harmful levels - were found back in September, but took four months to be announced.

In that time a working group on the subject was formed between Fonterra, the Ministry of Primary Industries and the dairy industry. And Fonterra listed its Shareholder Fund units on the NZX.

Fonterra spokesman Graeme McMillan said the milk co-operative had spoken to the larger investors and researchers who were all happy with its disclosure. "The clear message coming back from the markets is that they understand the issue and appreciate that there is no food safety issue here."

An investment fund manager, who did not wish to be named, said striking the balance between keeping investors informed and keeping a company's business shrouded from competitors was difficult.

The fund was comfortable with Fonterra's decision in this case, he said.

However, an unnamed senior researcher at a large brokerage said there "are some questions in the financial market" about the timing of Fonterra's announcement.

"Absolutely, it's not a good look," the researcher said.

Milford Asset Management executive director Brian Gaynor said he did not believe the issue was material, especially considering the small number of suppliers involved and the size of the conglomerate company.

Besides, investors who misunderstood the inferiority of unitholders to shareholders should not be getting upset about limited disclosure. Unitholders were not allowed to go to Fonterra's annual meeting because they were not shareholders, he said.

"We should know that unitholders are second-class citizens and we're always going to remain second-class citizens. People who expect them to adopt a high standard in relation to the unitholders were probably being a bit optimistic," he said.

Milford had bought into the company, but had sold up most of the units to take advantage of the high price, he said.

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Morningstar Research senior equities analyst Nachi Moghe believed Fonterra should have told investors about the material events that were going on.

"Even though it's not a safety risk, it's Fonterra's reputation that is on the line, so they should have disclosed it from that perspective."

The value of the Fonterra units had fallen about 3 per cent since the news was released, but many funds had been selling the units once it broke the $7 mark, to pocket the profit. The unit price peaked at $7.49 on January 17. It closed 2 cents lower yesterday at $7.03.

Tower chief executive Sam Stubbs said the company was not invested in Fonterra, so did not have a view.

NZX chief financial officer Bevan Miller said he could not comment on Fonterra's disclosure over DCD.

It was a matter for Fonterra, he said, and the company had made a disclosure on the subject.

When asked whether such a disclosure should be timely, he repeated that he could not comment.

AMP Capital was invested the Fonterra fund, but would not comment.

Media inquiries have revealed that other dairy processors, including Westland, had been kept in the dark for four months about Fonterra's September discovery. Some have been fielding calls from alarmed overseas customers.

One exporter, who did not want to be named, said it was unhappy to learn only last Thursday, at the same time as the public, that Fonterra had found DCD residue in September.

Most sizeable independents companies, including Westland, belong to the Dairy Companies Association of New Zealand (DCANZ), which was part of a DCD "working group" formed by MPI in December after Fonterra informed the ministry in November of its September discovery.

DCANZ chief executive Simon Tucker said association members were told of the DCD issue in a teleconference "about a week" before the public announcement. DCANZ chairman Malcolm Bailey, a Fonterra director, could not be contacted.

- The Press

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