NZ dollar dives on milk scare

Dairy producers in New Zealand are bracing for a world of economic pain after a threat by suspected environmental activist to contaminate baby formula led to a steep decline in Chinese demand, the head of an exporter group warned on Wednesday.

Chairman of the New Zealand Infant Formula Exporters Association, Michael Barnett, said several small companies marketing milk powder in China were already reporting sharp cuts in orders.

"We've had our first response from the distribution network. They've reduced their orders, some of them by up to 70 percent."

The shockwave follows Tuesday's announcement that New Zealand police have launched an investigation into an anonymous blackmailer, who mailed letters containing small packages of baby formula to the National Farmers Federation and the dairy giant Fonterra back in November. The suspect threatened to poison infant formula with the agricultural pesticide 1080 in retaliation for the country's use of the toxin for pest control.

New Zealand Prime Minister John Key called the threat a "a form of eco-terrorism without doubt."

Tainted milk trauma

The alarm sent the country's currency crashing to a five-week low, amid concerns that the country's biggest export market could turn its back on New Zealand's crucial dairy sector after Chinese authorities said it would increase scrutiny of milk powder imports from the island nation.

"China has already taken steps and will demand each batch of milk powder imported from New Zealand has an official New Zealand certificate that it does not contain [pesticide]1080," the country's General Administration of Quality Supervision, Inspection and Quarantine said in a statement.

Baby formula is a particularly sensitive issue in China since a 2008 scandal over tainted milk powder, which killed at least six children and left 300,000 more ill. The scare led many Chinese families to switch to imported products, making the current panic all the more detrimental to consumer confidence.

Existential threat

Dairy products make up about a quarter of New Zealand's total export earnings. For years, China has driven that demand, placing nearly $3.11 billion (2.94 billion euros) worth of foreign milk-related orders in 2014 - nearly one-third of that sector's global exports that year.

In an effort to soften the economic blow, New Zealand's agriculture ministry (MPI) on Wednesday stressed that there were no signs of the pesticide in the dairy supply chain. The MPI said it had been informing and consulting with international customers and regulators for the last three to four weeks.

"The overseas markets and regulators we've reached out to are responding in a very calm way," said Scott Gallacher, director-general of the Ministry of Primary Industries.

Fonterra, the world's largest dairy exporter, began testing its products for the poison in mid-January.

New Zealand is still recovering from a false 2013 botulism alarm, which saw baby formula being taken off shelves from China to Saudi Arabia.

pad/uhe (AP, Reuters)