Baby formula 1080 poison threat: Dollar weakens

The New Zealand dollar dropped by half a US cent on news of a threat to contaminate infant and other formula with 1080 poison.

But economists said it did not look as though the scare would cause the dairy industry or the currency lasting damage.

The police and the Government said they had started an investigation into a criminal threat relating to the Government's use of 1080 for pest control.

Government officials said the likelihood of the threat being carried out was extremely low.

In the foreign exchange market, the NZ dollar weakened as talk of an announcement about the dairy industry - which accounts for about 10 per cent of New Zealand's GDP - spread. In the minutes before the 3.45pm statement, the kiwi went from US73.40c to US72.77c, then back up to to US73.10c, before settling at around US73.0c late in the session.

NZX-listed Fonterra Shareholders' Fund units and shares in Synlait Milk and A2Milk were put on a temporary trading halt before the announcement.

When trade resumed, Fonterra units dropped 5c to $5.80 and Synlait Milk shares 5c to $2.90. Shares in A2 Milk rose 1c to $1.54.

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The announcement raised questions about who knew what and when, as dairy futures had been falling sharply in the past few trading days.

Commentators had speculated that the decline was caused by Fonterra's decision to put more product up for sale on the GlobalDairyTrade auction platform, but some said the 1080 threat stacked up as a far more compelling reason for the 15 per cent decline.

"My suspicion is that information has got out about this threat to infant formula," ASB Bank rural economist Nathan Penny said.

"That would be a more plausible reason for a fall of that magnitude."

Normal futures trading will resume today.

ANZ Bank rural economist Con Williams said he was confident the threatened contamination issue would soon pass.

"There have been a lot of things going on in the background to ensure that this threat has not been carried out," Williams said.

"From what we understand, the major markets have been pretty comfortable with that, so that is really key for us.

"As long as that continues to be the case, it should blow over quickly."

ASB's Penny also doubted the scare would have a long-term effect on the industry.

"There will be a lot of management of the public relations around this. Whether there is a lingering impact we will have to wait and see, but if they can close down the issue quickly, then I would not expect to see a lasting impact," he said.

Economists said the next month will be critical and the effect of the incident would depend on how it played out in international markets.

The dairy industry is a $15 billion export earner and provides about 30 per cent of New Zealand's exports.

In a commentary, the ANZ bank said: "While a threat is a long way from reality the mere hint highlights the importance of New Zealand's food safety regime and the downside risks to the NZ dollar that could come from a sector-wide issue in dairying."

Fonterra said its milk and products were safe and of high quality.

"We are playing our part in helping the Government manage the criminal threat, as is the rest of the dairy industry," it said.

It is not the first time Fonterra has faced food safety challenges.

But economists said there was little evidence that the latest scare would affect dairy prices beyond a few minor short-term blips.