FONTERRA chief executive Andrew Ferrier says it looks likely the cooperative's 10,724 farmers will have to write off their entire investment in toxic Chinese joint venture Sanlu.
Thousands of Chinese children fell ill and some babies died after being fed milkpowder deliberately adulterated with melamine -- much of it ending up in Sanlu's Beibei infant formula.According to the Beijing Review, Sanlu expected to have to pay compensation claims totalling 700 million yuan (about $NZ188 million) to consumers whose infants became sick or died after drinking its tainted baby formula.
Mr Ferrier said today that while no agreement had been finalised around the sale of Sanlu's assets, "it seems more likely that the proceeds of these assets will go to Sanlu's liabilities".
"It is increasingly likely that Fonterra will have to write off the balance of its investment," he said.
This had been taken into account in today's announcement that Fonterra expect the current season's payout to be $6/kg -- 14 per cent down on the original forecast of $7/kg.
Fonterra last season made $9.3 billion for its farmers -- the equivalent of an average $867,213 for each of them -- after soaring commodity markets pushed the payout up to $7.90/kg.
Since then, it has written down by $139 million the book value of its investment in the Sanlu company, in which it holds a 43 per cent stake.
Now it looks as though the farmers will have to write off the remaining $62m in book value.
The loss is relatively small -- in proportion to last season's windfall payout -- but many Fonterra farmers are unhappy the reputation of dairy foods has been damaged, and that they are tied to the issue.
"Fonterra farmers are disturbed that our cooperative's name has been associated with the milk supply contamination in China," the farmers Shareholders Council said this month.
"This may be a setback for the board in gaining continued farmer support for Fonterra's offshore growth strategy," the council said in its annual report.
Sanlu was reported to now be nearly bankrupt.
Fonterra had to recall one batch of its own brand Anmum Materna milk because it had been made by Sanlu using contaminated milk, and it has had to devote resources defending its brand in markets such as Bangladesh and the Philippines.
It has separately put $8.4m into a Chinese charity for child health, but this did not stop the reputational damage spreading to Fonterra itself.
It was named on a list of the world's largest companies most criticised for their impacts on the environment, health and communities, by Swiss-owned RepRisk, a consulting firm that analyses companies' exposure to controversial issues and news.