Yovich & Co. Weekly Update - 5 August 2013

Aug 5, 2013 | Commentary

This Week's Themes

• What an interesting few days on the market it has been as speculation and media hyperbole continue to hit the news wires regarding the Fonterra Botulism contamination story. Despite this, the share market was up yesterday as investors looked for facts.

• Global markets last week were up as an upbeat jobs report in the U.S. coupled with a further back track from Ben Bernanke regarding a slow down in stimulus gave investors confidence in equity markets.

• The Kiwi Dollar was down heavily against the US Dollar on strength of the American markets, yet rallied against the Aussie as it is expected that the RBA will drop the official interest rate to a record low of 2.5%.

Investment News

Fonterra Share Fund (FSF.nz) – My Thoughts on the Botulism Contamination.

What timing, a few days after I send out my first positive note on Fonterra and the company releases to the market news that they have supplied what could be toxic milk powder. OK, enough of the drama.

The markets have bounced back and for good reason, at the time of writing this note:

• The share price for Fonterra has rallied to over $7.00 after opening on Monday morning at $6.50,

• The Kiwi dollar has bounced back to 78.5 U.S cents, the same level it was before the market opened on Monday.

• The other dairy stocks listed on the NZX, Synlait and A2 milk are at week highs.

• The NZX50 is unchanged from the close last week.

There was a conference call from Fonterra this morning and First NZ Capital have highlighted the following points made in that conversation:

• There have been no reported cases of any illness or Botulism.

• The specific batch accounts for 38 tonnes or 0.0015% of the total annual milk production for Fonterra in NZ.

• The cost of product recall could run into millions of dollars. FNZC expects that this (some, if not all) will likely be covered through insurance in place.

• The Product (WPC80) is an ingredient that is used to produce animal feedstock and grown up nutritional food that is subject to further high-heat treatment.

• The contamination was identified when some of the batch was used in the manufacture of infant formula and because of this purpose, was subject to more rigorous food safety and bacterium threshold tests.

• The product quality issue is unlikely to be systemic and is a one off contamination due to 'human error'. It was the result of connecting pipe (flexi-hose) that was not properly sanitised in a temporary setting toward the end of the production season at Fonterra's Hautapu manufacturing plant in May 2012.

• Apart from the official announcement by Chinese Authorities temporarily suspending imports of certain Fonterra products and reports of a temporary import ban on NZ dairy products in Russia, Fonterra is not aware of other countries closing their borders to NZ's or Fonterra's dairy products.

Overall, it is a serious issue that has been identified before anyone has fallen ill and Fonterra is doing everything it can to limit the damage. Food safety and especially baby food safety is of absolute importance to the Dairy industry and also highlights New Zealand's reliance on the sector and its reputation. At this stage I do not believe that any on-going harm has been done but this could change if further scares like this surface.

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Jarrod Goodall



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