Fonterra facing long-term export crisis

A single dirty pipe. That is all it has taken to cause a slump in both the Kiwi dollar and the Fonterra share price (FSF) this morning.

Russia has banned all New Zealand milk products and China has imposed a partial ban after a milk contamination scare.

The concentrated whey product, used in several food products but mostly baby formula, has been traced to a dirty pipe in a Waikato plant. Around 900 tonnes of the contaminated concentrate, which can cause botulism, was sold by eight companies in seven countries.

Accusations have been levelled that the company has been aware of problems with the contaminated pipe since March and that little has been done to rectify the situation. It is also understood the product in question was manufactured in May last year.

As one of Australia’s biggest dairy producers, the scandal is likely to have long-term impact on the company’s future, particularly if the accusations of neglect and oversight prove to be correct.

The indefinite bans imposed by both China and Russia will severely curtail export income, revenue and earnings and are likely to be extended to other markets.

At this stage, it is too early to quantify the damage but unless swift action is taken, it could be extensive.

Fonterra shares were hit hard when the Kiwi market opened and declined further in local trade. Fonterra Shareholders Fund slumped 7.45% on the ASX in early trade to $5.84.

Given dairy products account for 30% of New Zealand exports, the Kiwi dollar came under enormous pressure, dropping almost 2c to US76.99c.