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New Zealand’s World Dairy Dominance Becomes Its Achilles Heel

August 6, 2013
Fonterra export ship

"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."

Matthew Brockett and Tracy Withers

New Zealand is finding that its greatest strength is also its Achilles heel.

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.

"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.

Product Recalls

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, Fonterra had to assure China that traces of an agricultural chemical found in some milk posed no health risks.

"It’s been a continuation of failures of quality assurance," said Stephen Julian, CEO of Peak New Zealand, whose baby formula is sold in China and doesn’t contain the contaminated ingredient. "It is going to damage New Zealand’s integrity for a long time to come unless the government steps up and gets involved."

Fonterra Inquiry

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