Botulism scare: Fonterra braces for fallout

Fonterra's head of NZ Milk Products Gary Romano, left, and communications boss Kerry Underhill say the focus has been on consumer safety. Photo / Richard Robinson

Whey contamination scare brings worries about stock price and the NZ dollar.

Fonterra's unit price is likely to take a hit, and the New Zealand dollar already has, this morning as markets come to terms with the latest food contamination scare to come from the co-operative dairy giant, market sources said.

Fallout from news that a dirty pipe at Fonterra's Hautapu plant in the Waikato might have contaminated three batches of a whey protein with bacteria that can cause botulism, could also have negative implications for dairy product prices at this week's GlobalDairyTrade auction, they said.

Trade Minister Tim Groser said China had introduced a blanket ban on all New Zealand milk powder imports in response to the news.

At the market's opening today, the Kiwi had slumped to a month low of 76.99 US cents, and recently traded at 77.15 US cents, down from 78.87 cents at the 5pm market close in Wellington on Friday.

Bank of New Zealand currency strategist Mike Jones earlier said the New Zealand dollar had started to weaken on Friday as the news filtered out to foreign exchange markets but he expected the currency to fall by a further half to one US cent when trading resumes today.

"I certainly think that the Fonterra news is going to take a gouge out of the currency at the Monday open," he said. "There is still clearly a lot of uncertainty and I think the currency market is going to shoot first and ask questions later," Jones said.

"The key here is that it is a one-off - it is something that has happened - so the implications for markets will depend on reputational issues around Fonterra," Jones said.

Westpac economist Nathan Penny said there was a risk that dairy product prices would fall, which may flow into the value of the New Zealand dollar.

He said the "safety premium" built into New Zealand product prices was now under threat. "The safety aspect of New Zealand product was one of the country's main competitive advantages," he said, adding the Chinese melamine scandal of 2008 had worked in New Zealand's and other non-Chinese producers' favour, enabling them to charge a premium.

Mark Lister, head of private wealth research at Craigs Investment Partners, expected to see a fall in the unit price, and that negative sentiment could spill into the other listed dairy companies, A2 Milk and Synlait Milk.

"Fonterra will be well and truly in damage control mode now and the key for them will be to retain the credibility of their products," Lister said.

Shane Solly, portfolio manager at Mint Asset Management, said it was too early to tell what it would mean for the company's profitability.

"It's all part of the risk of being part of the food chain," he said.

Fonterra's head of NZ milk products Gary Romano said it was too soon to discuss the potential financial impact of the contamination scare on the company.

"Our focus has been on consumer safety," Romano said. "Those [financial] considerations will come further down the track."

Federated Farmers dairy chairman Willy Leferink said the group would hold off making any judgments. "We don't want to put any speculation in the way of the facts that we need to deal with first," he said.

"We need to make sure that we get to the bottom of this so consumers can rest assured that all the products are safe."

The New Zealand dollar finished local trading on Friday at US78.87c and the units, which give non-farming investors access to Fonterra's dividend flow, closed at $7.12.

The weekend's announcements will come as a blow to the dairy sector just as it successfully bounces back from last summer's drought.

Fonterra last week raised its forecast milk price to farmers by 50c for the 2013/14 year to $7.50 a kg of milk solids, reflecting constrained global supply and the lower New Zealand dollar, and just 10c short of the record high of $7.60 a kg recorded for the 2010-11 season.

Economists said then that the improved payout would give the economy a big lift and would help farmers clear debt incurred during the drought.

Weakness in the Fonterra unit price emerged last month when it signalled its earnings would fall 7.3 per cent short of prospectus forecasts in the current year.

In mid-July, Fonterra announced a 9 per cent price cut in its Anmum maternal health products sold in China just as the People's Republic started an investigation into the pricing of dairy products there.