Botulism scare shows New Zealand reliance on dairy monopoly

WELLINGTON, New Zealand • When dirty pipes at a rural New Zealand milk factory put the entire nation on high alert, it was an unsettling reminder for many New Zealanders that their prosperity is tied to a single company.

The company, dairy giant Fonterra, on Saturday announced that the unsanitary pipes had tainted some of the whey concentrate it sells for use in infant formula with a type of bacteria that can cause botulism. The revelation sparked the type of response some countries might reserve for a terrorism alert, with dozens of officials and diplomats assigned to around-the-clock crisis management and the Prime Minister John Key saying he was willing to fly to China, a crucial market, if needed.

By Wednesday, Fonterra appeared to have contained the threat when it announced that all the affected infant formula had been isolated or recalled, and that no babies had gotten sick.

But the panic underscored how dependent New Zealand's economy is on agriculture in general and Fonterra in particular. Fonterra's annual revenue of $16 billion is equivalent to 10 percent of New Zealand's entire economy, meaning everyone from farmers to homeowners were left holding their breath over its dirty piping.

In a country that has always relied on its farmers to pay the bills, Fonterra has become a behemoth, exporting more in dairy products alone than the nation's combined exports of lamb, beef, fruit and wine.

Some 70 percent of New Zealand's export earnings come from such primary products, and the country has long feared anything that could threaten its farming — in particular an outbreak of the bovine foot-and-mouth disease. A 2003 study by New Zealand's Reserve Bank and Treasury estimated that even a limited outbreak of the disease would cause the currency to plunge by 20 percent and shrink the economy by 8 percent in two years.

New Zealand has tried over the decades to diversify its economy. It has developed tourism and some niche manufacturing. Filmmaker Peter Jackson has almost singlehandedly built a movie and special effects empire in the capital, Wellington. But the country's mild weather, abundant rain and verdant farmland have kept agriculture at the economy's heart.

"The caricature over many years has been we should be diversifying away from agriculture," said New Zealand Trade Minister Tim Groser in an interview with The Associated Press. "I think we should be adding to the extraordinary strengths we have within agriculture."

He said the country could achieve that by selling more branded and finished products.

Within the economy, Fonterra has become the linchpin. A cooperative jointly owned by some 10,500 farmers, Fonterra collects 89 percent of the country's milk, giving it a near-monopoly in dairy. It was created in 2001 when politicians passed a law that allowed dairy farmers to avoid antitrust rules. Many argued they needed a single company to compete effectively in the global marketplace. And since its creation, Fonterra has flourished. It now collects 17 billion liters (4.5 billion gallons) of milk each year from New Zealand farms and exports 95 percent of it.

It found its most important market in China. In 2008, many parents there switched to buying expensive imported milk after six babies died and thousands more were sickened when local milk formula was tainted with the chemical melamine. New Zealand now supplies China with more than 80 percent its imported milk powder, and the market is growing rapidly.

David Robb, a professor at the University of Auckland Business School who lived in China for seven years, said Fonterra was applauded at the time of the melamine scandal because it helped blow the whistle; it was a minority shareholder in a dairy company that had tainted its milk. He said one student came into his Beijing office weeping, wanting him to thank New Zealand's Prime Minister for helping save Chinese babies.

But Robb warned that Chinese consumers are more concerned with price and quality than with remaining loyal to a particular brand. He said New Zealand risks losing its credibility and customers in China because of the latest scare.

Fonterra ran into problems even before the botulism incident. In January, the company announced it had detected trace amounts of the agricultural chemical dicyandiamide in some of its products, prompting alarm and a ban on the chemical's use on New Zealand farms. On Wednesday, China announced that Fonterra was one of six milk suppliers it had fined for price-fixing, imposing a penalty on the company of 4.5 million yuan ($720,000).

Willy Leferink, a farmer in the town of Ashburton and dairy chairman for advocacy group Federated Farmers, said farmers have become frustrated with the problems.

"The biggest thing will be for Fonterra to convince authorities, mainly China of course, that this is a little hiccup and we are truly sorry," he said. "But there's no headroom left. If we do this again in half a year's time, all hell will break loose, because we would have become a very unreliable player."

Fonterra's Chief Executive Theo Spierings, who flew to China to reassure the public and liaise with authorities there, said Wednesday that the company's reputation had been damaged in the short-term but he expected it would be restored, based on the reactions he received in China.

Fonterra officials declined to comment on the company's role in the New Zealand economy.

But Tim Hazledine, an economics professor at the University of Auckland Business School, said he's skeptical about the benefits of the monopoly. He said he believes that competition typically achieves better results.

"Fonterra might be too big to fail," he said. "But it's not too big to be foolish or flounder."