Fonterra on Wednesday admitted it cannot save its Chinese Sanlu brand after a contaminated milk scandal resulted in a $139 million loss for the New Zealand dairy giant.
Four babies in China have died and more than 54,000 have required medical treatment after drinking baby formula contaminated with the industrial chemical melamine.
It is thought Chinese milk operators added nitrogen-rich melamine to watered-down milk to cheat in quality checks, which often use nitrogen levels to measure the amount of protein in milk.
Nearly 13,000 Chinese infants have been admitted to hospital, while 104 are in a serious condition suffering from kidney stones and agonising complications. Four children in Hong Kong have also been made ill after consuming the tainted milk.
Twenty-two companies in China are being investigated in the scandal, including Sanlu Group, which is 43% owned by Fonterra.
Fonterra said on Wednesday it has written off the brand value of its Sanlu operation, saying it cannot be salvaged and the company has learnt "an incredibly painful" lesson.
Fonterra said it is disgusted and appalled that Sanlu did not let it know about the milk contamination crisis earlier.
Chief executive Andrew Ferrier said Fonterra now valued its investment in Sanlu at $62 million, after booking a charge of $139 million to reflect product recall costs and brand value decline.
Mr Ferrier said the future of the Chinese company is unclear.
"Sanlu is a complicated organisation because there's a number of different joint ventures that came into it. So it's quite cloudy now for us to deal with all the various different players and how this is going to line up.
"We want to continue to bring world class standards into the Chinese market and we've just got to figure out the most effective way to do that."
Mr Ferrier said Fonterra is deeply saddened and sorry for those affected by the crisis. However, he says Fonterra still wants continue working in China and the country is a core part of its growth strategy.
China's official Xinhua news agency reported that Sanlu knew in June of problems with its milk powder.
However, it only officially reported the poisonings to Shijiazhuang, the north Chinese city where it is based, on 2 August and Shijiazhuang failed to report the poisonings to a higher authority until 8 September, after the Beijing Olympic Games had ended.
'Disaster' for Fonterra
Federated Farmers dairy chairman Lachlan McKenzie says Fonterra's experience with Sanlu has been a disaster, with the brand effectively written off.
Mr McKenzie says in hindsight, Fonterra had not been as cautious and as diligent in its processes and believes the company has been naive.
Meanwhile, farmers in New Zealand are to have their milk payout reduced in the current season.
Farmers are paid $7.90 per kg of milk solids for the past season, amounting to $9 billion. But Fonterra is forecasting that will drop to $6.60 per kg for the 2008-2009 season. Chairman Henry van der Heyden blames falling global demand because of rising prices.
Other tainted products in China
Chinese Agriculture Minister Sun Zhengcai said he would "battle" merchants blamed for selling adulterated milk to dairy companies, acknowledging the problem extended far beyond infant formula.
China has said it found melamine in nearly 10% of milk and drinking yoghurt samples from three major dairy companies: Mengniu Dairy Co Ltd, the Inner Mongolia Yili Industrial Group Co Ltd and the Bright Dairy Group.
Mr Sun singled out local "milk stations," which collect fresh milk from farmers and sell it on. Their operators have been blamed for adding melamine to sub-standard or watered-down milk to fool quality checks measuring for protein. Many were unregistered and unregulated, he said.
China has the world's third biggest dairy sector by volume, after India and the United States, the Chinese dairy products industry association recently estimated.
