Melamine Problem ‘Sharp Reminder’ to Dairy Businesses

By Ron Johnson Dairy Editor
Friday, December 5, 2008 3:25 PM CST

China’s melamine scandal has given international dairy businesses a “sharp reminder” that they need to be ready for problems in developing countries. So says William Dobson, an economist at the University of Wisconsin’s Babcock Institute.

In a recently released publication, “The Melamine Crisis in China's Dairy Industry - Implications for International Dairy Business,” Dobson reviews what happened in China and examines some of the implications. Dairy products in China were found to be contaminated with melamine, a chemical that’s used to make fertilizers, plastics and other products.

Melamine is high in nitrogen, so it was being used to make milk seem higher in protein. The melamine was added to mask the fact that the milk was being thinned with water.

Because of the melamine, more than 50,000 people were sickened, Dobson notes. In addition, at least four babies died from kidney failure.

In recent weeks, melamine has been discovered in Chinese milk powder, baby formula, milk, candy, cookies and yogurt. After “lengthy delays,” says Dobson, contaminated foods were removed China’s stores and from markets in some other nations.

“At least 22 Chinese dairy companies have sold dairy products contaminated with melamine. Among these firms was Sanlu Dairy, one of China’s biggest producers of infant formula, in which Fonterra of New Zealand has a 43 percent equity interest,” Dobson points out. “Other major Chinese dairy companies implicated in the scandal are Yili, Mengniu, and Bright Dairy. More than a score of countries have banned imports of Chinese food products containing dairy ingredients.”

Dobson goes on to note that Mengniu has close ties to foreign companies. Mengniu is a partner in a joint venture with Arla Foods, of Denmark and Sweden.

“Obvious implications emerge from the melamine scandal for China’s government and food safety authorities,” says Dobson. “China’s agency for quality supervision, inspection and quarantine, or other government units, must develop better procedures for preventing contamination of food products. Government officials also need to improve procedures for informing consumers about dangerous products in a timely fashion. Failure to provide such safeguards will invite repeated food contamination scandals and have major, deleterious effects on China’s food and agriculture exports.”

While China’s milk contamination problem was “huge and tragic,” according to Dobson, it’s not something that only that country needs to deal with. He says, “Farmers, middlemen and processors in some other developing countries adulterate milk with water and harmful chemicals.”

That means the problem of adulterated dairy products has implications for dairy companies that do business internationally. Here’s what Dobson says those implications are:

- “Firms investing in dairy businesses in developing countries need procedures to safeguard the entire milk supply chain from the farm to food markets,” the economist says. “Failure to do so will expose the firms to problems such as those encountered by Chinese dairy processors when middlemen added melamine and water to milk purchases from farmers before delivering it to processing plants.”

- Better testing methods to find adulterants are needed.

- A multinational dairy company’s reputation for selling high-quality dairy products can be damaged by problems in the firm’s developing-country units,” Dobson says. “For example, while there is evidence that milk products from New Zealand were included in the sale of contaminated Chinese dairy products, Fonterra runs the risk of harming its brands and sullying the ‘clean-green’ image of New Zealand dairy products as a result of association with problems encountered at Sanlu in China.”

- Dairy companies doing business internationally need to have plans on how they will handle scandals over their products in developing nations. “For instance,” says the economist, “while Fonterra is a well-run firm, it apparently lacked procedures for dealing effectively with the complex dairy product contamination scandal in China. As a result, Fonterra came under scathing criticism in New Zealand and China for delays in notifying consumers of product contamination at Sanlu Dairy.”

The full impact of the China milk contamination will not be known for some time, Dobson notes. For example, how will it affect milk consumption there? What will it do to China’s dairy export business?

“But this scandal has given multinational dairy businesses a sharp reminder,” says Dobson, “of the need to be prepared for such problems in developing countries.”

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