New Zealand firms see slump in demand for infant formula from China after poison threat

WELLINGTON/SHANGHAI (Reuters) - Chinese demand for New Zealand infant formula has fallen after a threat by suspected environmental activists to contaminate the product with an agricultural poison, the head of an exporter group said on Wednesday.

Orders for infant formula, prized among China's growing middle class, have slumped after the New Zealand police on Tuesday said letters were sent to the national farmers' group and dairy giant Fonterra in November accompanied by packages of infant formula laced with poisonous pesticide 1080, formally called sodium fluoroacetate.

Following the announcement, China said it would increase scrutiny of milk powder imports from New Zealand, which depends on dairy products for about a quarter of its export earnings.

China is New Zealand's biggest dairy buyer, purchasing US$3.11 billion (S$4.31 billion) worth of milk powder and other products in 2014, nearly one-third of all global exports. The announcement has stung the New Zealand dollar which hit a five-week low on Wednesday.

Small New Zealand companies marketing formula in China were already seeing a cut in orders, said Mr Michael Barnett, chairman of the New Zealand Infant Formula Exporters Association. "We've had our first response from the distribution network. They've reduced their orders, some of them by up to 70 per cent," he told Reuters, adding that any negative online exposure could fan concerns in China.

The association includes small businesses which brand and market infant formula products manufactured by Fonterra and other New Zealand dairy companies.

China said it was stepping up measures to examine New Zealand milk powder even as New Zealand's Agriculture Ministry (MPI) on Wednesday reiterated that the pesticide had not entered the dairy supply chain. "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 1080," China's General Administration of Quality Supervision, Inspection and Quarantine said in a statement on its website.

The MPI said it began informing and consulting with major overseas dairy customers and regulators about the threat in the last three to four weeks, roughly a month after Fonterra, the world's largest dairy exporter, began testing dairy products for the poison in mid-January. "The overseas markets and regulators we've reached out to are responding in a very calm way," said Mr Scott Gallacher, director-general of the Ministry of Primary Industries.

The scare is the latest threat to New Zealand's dairy sector, which exported nearly US$11 billion (S$15.2 billion) in milk products in 2014, and follows a contamination scare in 2013, when a botulism-causing bacteria was believed to be found in one of Fonterra's products. The discovery was found to be false.