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Fonterra will "vigorously defend" a claim by French food processor Danone over last year's recall of whey protein concentrate.
The Auckland-based company is working through Danone's claim after negotiations for a commercial settlement failed. The French company will file papers in the High Court in Auckland today and has already served the arbitration papers to be heard in Singapore.
Fonterra "continues to be confident in its position and will vigorously defend any proceedings," it said in a statement. "Fonterra stands by its track record of having world-class food safety and quality standards, quality systems, and robust testing regimes across all its manufacturing facilities."
Danone will also terminate existing supply contract with Fonterra Cooperative Group and make "any further collaboration contingent on a commitment by its supplier to full transparency and compliance with the cutting-edge food safety procedures applied to all products supplied," it said.
Units in the Fonterra Shareholders' Fund [NZX: FSF] fell 2.1 percent to $5.74 on news of the action.
Last August, Fonterra quarantined several batches of whey protein concentrate amid fears it was contaminated with a potentially dangerous form of the clostridium bacteria. The whey protein was ultimately cleared as a false alarm.
The French company put the cost of last year's WPC 80 recall at 350 million euros when it announced its third-quarter results, while Auckland-based Fonterra recognised a contingent liability of just $14 million in its own accounts.
"It's hard to know at this point how much of a claim by Danone is real and how much is negotiating tactics," said Matt Goodson, managing director at Salt Funds Management. "At the moment this is a very news story driven equity market."
Of the eight customers affected by Fonterra's recall, the New Zealand company agreed to a commercial outcome with all of them except Danone, including extending supply contracts for the next 10 years and agreeing to volume increases.
In December, Fonterra chief executive Theo Spierings said he expected any court action would show the New Zealand company has no liability in its contract.
Salt Funds' Goodson said he has been struggling with the fund as an investment as Fonterra has had to contend with an unfavourable product mix where rising prices in whole and skim milk powders haven't been matched with manufactured products such as cheese.
"We really need to see a reversal with those markets for the fund to benefit," he said.
Last month Fonterra cut its dividend forecast to 10 cents a share from 32 cents while keeping the milk price at $8.30 a kilogram of milk solids, even though its calculations showed the price should rise to $9 per kg/MS.