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General Mills' beleaguered cereal business took another blow last week when the Food & Drug Administration revealed that Big G cereals treated with an unapproved pesticide were on store shelves for more than a year.

The situation has already caused short-term shortages of some General Mills brands as shipments were stopped; it's also expected to cut more than $60 million from earnings for the fiscal year that ended May 29.

Yet to be seen is whether the problem-which General Mills said rapidly became a "non-issue with consumers" following the initial disclosure-affects sales after the second wave of publicity sparked by the FDA announcement.

The problem began last year when a contractor treating oats at General Mills' grain elevators in the Duluth, Minn., area substituted the pesticide for another, similar pesticide approved for use on oats.

The marketer last month announced the FDA had discovered traces of the pesticide, chlorpyrifos-ethyl, in a routine inspection; the FDA and Environmental Protection Agency subsequently issued reports saying the level found wasn't a threat to consumer health.

With General Mills' help, the FDA is conducting a criminal investigation of the independent contractor.

An FDA spokesman said there was "no reason" to believe the pesticide-laced cereal was dangerous. "If we thought it was injurious, we could seize it ... and take it from the market."

Brands affected included some varieties of Cheerios, Lucky Charms, Kix, Frankenberry, Oatmeal Crisp and the recently introduced Reese's Peanut Butter Puffs.

After discovering the problem, General Mills voluntarily delayed shipments of some cereals and warehoused 15 million bushels of raw oats that may have been contaminated, causing shortages in some areas. It then decided not to ship finished cereals containing the unapproved pesticide, a move that will cost the company the estimated $60 million.

By last week, a spokesman said General Mills had found enough alternate supplies to resume full production, though it has also asked the FDA for a waiver to use the pesticide-treated oats in cereals.

Late last month, Chairman-CEO Bruce Atwater told Wall Street analysts General Mills expected summer sales and share numbers to be down due to the shortages.

He also said General Mills had "restrained" some planned cereal promotion and ad spending during the shortages.

The timing of the problem may be the most unfortunate factor; it comes as the Big G cereal division is struggling to get back on track (AA, July 4).

The General Mills spokesman said calls to the company's toll-free customer-service number showed consumer concern but "a lot of trust in the Cheerios name; they were mostly seeking reassurance."

Analysts and observers expect the situation to present more of an economic than consumer-confidence problem.

"It's just not going to have a major effect on their business," said consultant Burt Flickinger III of A.T. Kearney Co., New York. "Part of the reason is that for Cheerios, there's no tough competition ..."

Steven W. Colford contributed to this story.

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