The New Zealand government has provided details of how it plans to work hand-in-hand with industry help rebuild the reputation of the country’s dairy exporters in the wake of the recent high-profile Fonterra recall. While much can be done to rebuild trust, the scandal comes as competition to build a safe raw milk supply is heating up in one key market – China. Katy Askew reports. 

New Zealand wants to win back “full market access” and reassure overseas customers its dairy products are safe. In particular, New Zealand’s dairy industry is focused on rebuilding trust in the highly sensitive – and highly lucrative – Chinese dairy sector. 

New Zealand Trade Minister Tim Groser and Minister for Primary Industries Nathan Guy have today (11 September) detailed a joint plan that will see the government working to “reassert New Zealand’s reputation”.

“We need to restore full market access to those markets where restrictions have been put in place, re-establish confidence in the robustness of our food safety system, and reaffirm the positive image of New Zealand brands,” Groser insisted.

Trade restrictions were put in place in by China after Fonterra, New Zealand’s largest dairy exporter, issued a recall of whey powder concentrate over concerns that it was contaminated with a bacteria that can cause botulism.

The recall turned out to be a false alarm. However, the reputation of Fonterra – and New Zealand dairy as a whole – was tarnished.

The government plans to work in “close consultation” with affected companies to rebuild trust with their in-market partners and customers, Groser said. In particular, the government has set aside NZ$2m in funding to help SMEs re-establish their position in China, the Trade Minister revealed.

Ministers are also scheduling an “intense programme of targeted visits” with counterparts and regulators overseas. Such efforts could do much to stress the professionalism and stringency of New Zealand’s regulatory framework.

“The botulism scare was a reputational hit… even if it was a false alarm – people will still think of that when they hear the name, even if they know that the milk turned out to be okay,” James Roy, senior analyst at China Market Research Group, suggested.

However, the swift response to the scare from both Fonterra and New Zealand regulators provides cause for optimism. “I don’t see there being significant damage in the long term as long as they manage to keep a strong safety record in the future,” Roy suggested.

While Fonterra has come under fire for its response, the dairy group was fairly quick to initiate the recall of the WCP80 ingredient once the contamination issue had been identified. The firm alerted trade customers and its key executives travelled directly to China to minimise damage.

Following the recall, Fonterra launched a high-profile operational review that identified a number of issues that the dairy processor said it is moving to address. 

Fonterra’s key findings, released last week, included details of a “one-off lapse in information sharing” that resulted in delays in testing. The company also said the issue should have been brought to CEO level sooner and product tracking took “longer than it should have” due to a major upgrade to computer systems at some of its sites. The dairy giant emphasised that it is taking – or has already taken – corrective measures. 

Fonterra has also made it clear it remains comitted to investing in providing Chinese consumers with a safe dairy supply. The company announced yesterday (10 September) it will open its second “milk hub” in the market. The large scale farming project is part of its plan to significantly ramp up milk production in China by 2020. The company said it would help it to meet growing customer and consumer demand for high quality fresh milk in China.

“There are significant opportunities for Fonterra to help bridge this supply gap by growing our own domestic milk supply in China and continuing to import our high quality finished dairy products,” president of Fonterra’s operations Greater China and India, Kelvin Wickham, said.

It is easy to see why New Zealand dairy exporters are placing such a strong emphasis on China. Raw milk production in the country increased by 2% last year, while demand rose by 6-8%, Fonterra said. Due to their geographical proximity, the New Zealand dairy industry is in prime position to benefit from the growing Chinese appetite for dairy. 

However, while the blow to Fonterra’s reputation – and that of New Zealand dairy imports – may be a short-term issue, it comes at a time when competition is intensifying in the Chinese dairy sector. 

Within China, there has been a push to consolidate the dairy industry and build a safe and reliable raw milk supply following a number of highly damaging safety scares.

Domestic firms are investing heavily in measures to modernise and integrate supply chains.

For example, China Mengniu Dairy Company, one of China’s largest dairy processors, recently acquired formula maker Yashili and raw milk supplier Modern Dairy. The firm has also sought to gain expertise by forming partnerships with international dairy groups Danone and Arla Foods.

Meanwhile, earlier this week Yili Industrial Group unveiled plans to invest in Hong Kong raw milk supplier China Huishan Dairy Holdings Co. as part of its drive to secure its milk supply. Fellow dairy major Yashili has also been given the green light to construct a NZ$220m (US$170.7m) infant formula production facility in Pokeno, New Zealand.

“The trend in the dairy sector is toward more consolidation in the hope that larger farms with more integrated supply chains will help reduce the incentives of farmers to adulterate their products,” Roy suggests.

So, while New Zealand dairy will likely bounce back from the botulism recall, the damage could have come at a key time in the development of dairy consumption patterns in China.

The race is on to offer Chinese consumers with safe, trustworthy dairy products.