Peanut costs adding up for food companies

By Julie Steenhuysen and Brad Dorfman

CHICAGO (Reuters) - Kellogg Co, the first company to report the financial costs of a sweeping U.S. peanut product recall caused by an outbreak of salmonella, said Thursday the withdrawals will likely cost it up to $70 million.

The recall, which has included more than 1,300 products from cookies and crackers to ice cream and pet foods, resulted from contamination at a single peanut plant in Georgia that sickened at least 550 people and may have killed eight.

Unilever, General Mills Inc and Nestle SA are among the major food makers that have recalled products, but many smaller manufacturers and grocery store chains have been affected. U.S. peanut farmers are worried about the impact on their revenue.

Kellogg Chief Executive David Mackay said in a telephone interview the recall would cost the company $65 million to $70 million, including accounting costs.

Kellogg last month recalled its own peanut butter crackers under the Keebler and Austin brands, as well as cookies and protein bars made on a production line used by another manufacturer that might have been using tainted ingredients.

Mackay said the company received certifications from outside inspectors that found nothing wrong with the ingredients, but the recall may force food companies to do more to ensure the safety of the ingredients they use.

"I think we, along with other food manufacturers, while we believe we follow best practices assuring food safety and quality, are going to have to revisit whether there are other things that we and the industry need to do differently going forward," Mackay said.

The outbreak has prompted President Barack Obama and several members of Congress to call for an overhaul of the way the Food and Drug Administration works, including one bill introduced Wednesday that would separate its food regulatory duties from its oversight of pharmaceuticals and over-the-counter drugs.

Mackay declined to comment on any legal action Kellogg might take, and said it was hard to speculate whether the company can recover any of the money.

Erin Swanson, a food industry analyst at Morningstar, said the costs for Kellogg were relatively modest.

The real question, she said, is how it affects consumer buying habits. "The one thing that still remains to be seen is how it impacts consumers'' perception," Swanson said.

The recall has also hit food service companies that used the peanut products. Even victims of an ice storm in Kentucky and Arkansas were given meal kits that included peanut butter packets that may contain peanut butter tainted with salmonella, according to the Federal Emergency Management Agency.

A FEMA spokeswoman said the agency was still gathering information on the number of kits involved in the recall.

(Editing by Maggie Fox and Vicki Allen)