Shares, currency dip as Fonterra fears hit markets

05.08.2013

Shares in the Fonterra shareholders' fund fell to their weakest of 2013, and the New Zealand dollar hit its lowest in more than a year as investors reacted to the dairy giant's second contamination scare this year.

Shares in the Fonterra fund tumbled nearly 9% in early deals on Monday to NZ$6.50, the lowest since December, while the Kiwi dollar dropped nearly 2 cents against the dollar to its weakest since June last year.

Both later staged some recovery after it emerged that China, New Zealand's top dairy customer, had limited an import ban to some whey-based products, rather than the full spectrum of Fonterra exports as had been rumoured.

"The market moves have not been sustained," Wespac analyst Imre Speizer said.

"Indeed the New Zealand dollar has reversed 1 cent, as official sources have confirmed significant importers such as China have not applied a blanket suspension of all dairy products, but rather a selective one relating to a minority of products."

Fonterra fund shares closed down 3.7% at NZ$6.86, while shares in rival milk group Synlait revived from early losses of 4% to close only 0.4% down at NZ$2.71.

Botulism risk

The moves followed the admission at the weekend by Auckland-based Fonterra, the world's biggest dairy exporter, that it had found bacteria that can cause botulism in whey protein concentrate shipped to China, Malaysia, Saudi Arabica, Thailand and Vietnam.

Tests begun in March, after the finding of bacteria of the genus Clostridium in Fonterra product, had on Wednesday turned up the botulinum species, the producer of a toxin potentially fatal in humans.

The contamination fears surround three batches of whey protein concentrate, an ingredient for products including infant formula and sports drinks.

It represents the second contamination scare this year, after the revelation in January of the discovery in milk of small doses of dicyandiamide (DCD), a toxic chemical typically, in New Zealand, applied to pasture in autumn, winter and spring in in an effort to reduce nitrate leaching into water courses, and to cut emissions from cow dung.

"We really regret the distress and anxiety which this issue could have caused," Theo Spierings, the Fonterra chief executive, said on Monday.

"We totally understand there is concern by parents and other consumers around the world. Parents have the right to know that infant nutrition and other dairy products are harmless and safe."

Key market

The Chinese market is particularly sensitive to milk quality after the melamine tainting scandal in 2008, in which unscrupulous suppliers added the toxic substance to milk to give it a falsely high protein reading, and so gain bigger payouts, but caused thousands of babies to fall ill, with some fatalities.

The scandal has continue to boost demand for foreign milk, making China a huge market for the likes of Europe's Danone as well as Fonterra, and creating a thriving market in milk powder smuggling.

Indeed, Danone shares, in falling 1.4% in early deals, were the biggest losers in Paris, although they had reduced losses to 0.9% by late morning trading.

Arla last year set up a joint venture with Chinese dairy group China Mengniu Dairy, and food giant Cofco, while France's Sondiaal has teamed up wth Synutra.

Synlait, the New Zealand milk group floated last month, has China's Bright Dairy as its top shareholder.

Fonterra - which was also linked to the melamine scandal though Sanlu, its Chinese partner company at the centre of the crisis – has since 2008 relied in the main on meeting Chinese needs through New Zealand-origin product, although it has also set up some dairy farms in the country, so gaining control of the whole milk supply chain.

Rivals react

Fonterra rivals on Monday distanced themselves from the co-operative's troubles, with Synlait reassuring customers that its products were "safe".

"Synlait Milk has not used any of the whey protein concentrate WPC80 recalled by Fonterra in the manufacture of its nutritional powder products such as infant formula," the group said.

Chief executive John Penno added: "We expect that this incident will result in some short term disruption to trade and some additional testing requirements for some markets.

"But we do not expect this event to impact the growth of our infant formula business beyond the immediate disruptions."

Murray Goulburn, Australia's top dairy exporter, on Monday "confirmed that its dairy products are safe and continue to be available in Australia and overseas".

"We are steadfastly committed to ensuring our products are not only safe but of the highest quality," Murray Goulburn chief executive Gary Helou said.


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