New Zealand Dairy Farmers Taking A Beating

A contamination scare at milk-producer Fonterra Cooperative Group Ltd. is jeopardizing export ties with China, which this year overtook Australia as its biggest trading partner. Dairy is the largest foreign exchange earner, accounting for 28 percent of overseas sales in an economy where exports make up about a third of output.

Because Fonterra is a Cooperative, when they lose money the farmers lose money.The farmers have to keep milking their cows even while countries are banning these products.

Fonterra will undoubtedly have to make up the costs of companies that had to recall their products. If someone gets sick from the whey powder in New Zealand they can not file suit under New Zealand Law. But if someone gets sick in another country they are ruled by that country’s laws.

“The events of the past few days are a stark reminder of New Zealand’s increasing vulnerability to a single product and to a single export destination,” said Doug Steel, an economist at Bank of New Zealand Ltd. in Wellington. “Any lingering major concern about the quality of New Zealand’s food production could have far-reaching economic implications.”

The nation’s currency fell to a one-month low after Fonterra, the world’s largest dairy exporter, said Aug. 3 that a dirty pipe at a processing plant may have tainted whey protein used in baby formula with botulism-causing bacteria. New Zealand’s “100% Pure” tourism slogan is becoming a “festering sore,” China’s official news agency Xinhua wrote in an editorial about the scare, saying that buyers of Kiwi goods are losing faith in its clean, green image.

New Zealand’s dollar fell more than 1 U.S. cent when markets opened on Aug. 5 and traders pared bets on higher interest rates this year on concern that the incident may weaken the $156 billion economy.

The news prompted product recalls in China, Vietnam, Thailand, Sri Lanka and New Zealand. Whey protein is used in goods ranging from infant formula to sports drinks. Fonterra Chief Executive Officer Theo Spierings apologized in Beijing on Aug. 5 and expressed optimism that Chinese import restrictions will be lifted soon.

In 2008, Fonterra’s Chinese partner Sanlu Group collapsed after locally made melamine-contaminated milk powder killed and hospitalized babies, causing an industry-wide scandal. In January this year.“This cuts to our reputation as a clean, green, 100 percent pure provider,” said David Shearer, leader of the main opposition Labour Party. While “white gold” has “done an enormous amount for our economy,” New Zealand needs to diversify, he told state broadcaster TVNZ.

Fonterra, New Zealand’s biggest company, accounts for about a third of the world’s trade in dairy products and posted revenue of NZ$19.8 billion in the year through July 2012.

It was formed in 2001 from the merger of the nation’s two largest dairy companies. Government legislation protected its virtual monopoly after Fonterra argued it needed scale to compete with rivals such as Nestle SA (NESN) in growth markets such as China.