Regulatory authorities within China have halted the import of milk powder originating from New Zealand and Australia after bacteria suspected of causing botulism was found in certain batches of the milk powder. Global dairy producer and distributor Fonterra was forced to alert eight of its customers of the potential contaminated whey protein concentrate.

Supply Chain Matters readers may recall our previous commentaries related to Fonterra that span the last four years. One of our very first series of commentaries in 2008 related to the melamine contamination of milk powder and milk products that occurred throughout China.  Tragically, six children died and thousands of children were sickened or suffered major health impacts. At the time, one of China’s largest dairy producers, Sanlu was directly involved in the melamine incident and that diary had a global joint partner, that being Fonterra.

Fonterra paid a dire price monetarily, by having to liquidate its entire ownership of Sanlu, while rebuilding its creditability as a major supplier to food companies such as Nestle and Kraft. In 2010, the global dairy producer was resolute to return to China and rebuild its brand creditability, by establishing a network of its own operated dairy farms within that country. It has since been building an integrated milk business through two directly owned dairy farms.

Because of that incident, even today, in spite of massive remediation efforts by China’s agriculture authorities, Chinese consumers have more trust in foreign brands and supply of dairy products than in Chinese brands. The sales of foreign infant formula brands remain as still rationed across China and in Australia because of overwhelming Chinese consumer trust and demand for such brands.

Our last commentary at the end of March of this year noted that New Zealand had been suffering the aftereffects of a major drought, the worst in 30 years. Fonterra was forced to warn of both supply and earnings impacts for the second-half of its fiscal year, has further indicated that the producer had re-initiated plans to move into China’s infant formula market, the same market. This producer was planning to launch its own Anmum brand of infant milk formula later this year along with plans to construct a Chinese plant to process ultra-high temperature (UHT) milk.

This latest incident of contamination may have an impact on those plans.

According to an article published on the CNBC web site, China’s consumer watchdog named four companies that imported the potentially contaminated batches from Fonterra. The four include Dumax Baby Food Company Ltd., a subsidiary of Danone, two subsidiaries of China based Wahaha Group, and the state-owned Shanghai Sugar, Tobacco and Alcohol Company. The article notes that because of domestic production shortages, milk powder supplies across China had already been scarce, and this latest incident could lead to market shortages. The latest incident was reported to have been caused by a dirty pipe at a particular processing plant. Botulism is a potentially fatal disease that affects muscles and the infant intestinal system. CNBC also reports that this is the second contamination incident involving Fonterra this year. The other was a January incident where traces of a toxic chemical were found in some of its products.

Other countries have also responded to the potential contamination, including Australia and Russia, who have each restricted imports of Fonterra products.

All in all, this latest contamination incident will have global impact for the dairy and milk powder related industry, and for China, another added concern that even foreign brands can present risk.  Our initially takeaway is that this is yet another reinforcement of how a dirty pipe at a processing facility can have significant quality and brand risk impact.  A globally extended food supply chain has multiple risk exposures, and quality monitoring and inspection systems need to have near zero-level tolerance for sub-standard production equipment.

For Fonterra, this incident will most likely be another important brand and supply chain challenge to overcome.

Bob Ferrari