Why A Contaminated Dairy Scare Is Causing Chaos For The New Zealand Dollar

The NZD took a hit on headlines that China was banning milk imports from New Zealand after a botulism scare. Botulism refers to a paralytic illness caused by a nerve toxin produced by the bacterium Clostridium botulinum.

New Zealand dairy producer Fonterra reported over the weekend that a strain of Clostridium, a bacterium that could cause botulism, was found in some of its milk products.

China accounts for 25% of demand for New Zealand's milk. In fact, China's milk powder imports from New Zealand climbed 34.3% year-over-year in the first half of 2013. This accounted for 83.3% of China's total milk powder imports. This shows why a botulism scare is huge not just for China but New Zealand as well.

"If there is any short-term trade impact it will happen at the low of export season and let’s also not forget dairy products can be stored for export at a later data, so any short-term economic impact could well be modest," according to Robert Savage at FX Concepts.

"Fonterra, which accounts for about a third of the global trade in dairy products and collects milk from 10,500 New Zealand farmers, has said it expects dairy demand in China to double by 2020. Clearly, this growth rate will be at risk and something for consideration."

Fonterra's CEO has apologized for the scare and is working with its regulatory authority to ensure that regulators at home and abroad are kept updated on the quality issue surrounding three batches of whey protein concentrate.

The New Zealand dollar which is already considered to by some experts to be overvalued is now at risk of a sell-off if its dairy trade is impacted further. It is also at risk if the Aussie dollar sees a further move below $0.87 after the Reserve Bank of Australia's rate decision tomorrow, writes Savage.

Here's a look at how the New Zealand dollar traded:

Here's a graphic from Reuters on New Zealand's dairy industry.