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Fonterra's unit price is likely to take a hit, as will the New Zealand dollar, this morning as markets come to terms with the latest food contamination scare to come from the cooperative dairy giant, market sources said.
Fallout from news that a dirty pipe at Fonterra's Hautapu plant in Waikato might have contaminated three batches of a whey protein with bacteria that can cause botulism, could also have negative implications for dairy product prices at this week's GlobalDairyTrade auction, they said.
Trade Minister Tim Groser said China has introduced a blanket ban on all New Zealand milk powder imports in response to the news.
Bank of New Zealand currency strategist Mike Jones said the New Zealand dollar had started to weaken on Friday as the news filtered out to foreign exchange markets, but he expected the currency to fall by a further half to one US cent when trading resumes today.
"I certainly think that the Fonterra news is going to take a gouge out of the currency at the Monday open," he said. "There is still clearly a lot of uncertainty and I think the currency market is going to shoot first and ask questions later," Jones said.
"It is something that has happened in the past so the implications for markets will depend on reputational issues around Fonterra," Jones said.
Westpac economist Nathan Penny said there was a chance that dairy product prices would fall, which may flow into the value of the New Zealand dollar.
He said the so called "safety premium" built into New Zealand product prices was now under threat.
"The safety aspect of New Zealand product was one of the country's main competitive advantages," he said, adding the Chinese melamine scandal of 2008 had worked in New Zealand's and other non-Chinese producers' favour, enabling them to charge a premium.
Mark Lister, head of private wealth research at Craigs Investment Partners, expected to see a fall in the unit price, and that negative sentiment could spill over into the other listed dairy companies A2 Milk and Synlait Milk.
"Fonterra will be well and truly in damage control mode now, and the key for them will be to retain the credibility of their products," Lister said.
Shane Solly, portfolio manager at Mint Asset Management, said it was too early to tell what it would mean for the company's profitability. "It's all part of the risk of being part of the food chain," he said.
Federated Farmers' dairy chairman Willy Leferink said the farmers' group would hold off making any judgements until the facts were known. "We don't want to put any speculation in the way of the facts that we need to deal with first," he said.
"We need to make sure that we get to the bottom of this so that consumers can be rest assured that all the products are safe," he said.
The New Zealand dollar finished local trading on Friday at US78.87c and the units, which give non-farming investors access to Fonterra's dividend flow, closed at $7.12.
The weekend's announcements will come as a blow to the dairy sector just as it successfully bounces back from last summer's debilitating drought.
Fonterra last week raised its forecast milk price to farmers by 50c for the 2013/14 year to $7.50 per kg of milk solids, reflecting constrained global supply and the lower New Zealand dollar, and just 10c short of the record high $7.60 per kg recorded for the 2010-11 season.
Economists said then that the improved payout would give the economy a big lift and would help farmers clear debt incurred during the drought.
Weakness in the Fonterra unit price emerged last month when co-operative signalled its earnings would fall 7.3 per cent short of prospectus forecasts in the current year.
In mid-July, Fonterra announced a nine per cent price cut in its Anmum maternal health products sold in China, just as the people's republic started an investigation into the pricing of dairy products there.
- Jamie Gray, APNZ business reporter