By Naomi Tajitsu
WELLINGTON, Aug 7 (Reuters) - New Zealand said on Wednesday its reputation as an exporter of safe dairy food remained at risk after a contamination scare, although an auction of Fonterra dairy products provided reassurance that global customers were continuing to buy its goods.
Fonterra has come under fire from the New Zealand government, farmers and financial regulators for dragging its feet in saying it sold whey protein products that contained a bacteria which can cause botulism - a potentially fatal food poisoning.
The country, which depends on dairy exports for a quarter of its overall exports, has been gripped by worries that a raft of recalls for infant formula in China and other countries could snowball into a slump in demand or even bans for other dairy products.
But an auction Tuesday evening showed global dairy prices near their highest levels since Fonterra began its auctions in 2008, levels supported by increased demand from growing middle classes in emerging economies.
Although Fonterra's GDT index slipped 2.4 percent at the fortnightly auction, this was partly a reflection of a near doubling in volumes made available to the market.
"It does not seem that the contamination issue is evolving into a serious negative for the wider economy," Westpac economist Nathan Penny said in a note to clients.
"The world is still paying high prices for most New Zealand products."
But Trade Minister Tim Groser said that New Zealand had a lot of work to do to regain trust among global customers.
"The market is being very measured in its reaction, in the same way that Chinese authorities have been very measured in their actions," Groser said on Radio New Zealand.
"Having said all those positives, let's agree that we're not out of the woods here, this problem is not now settled in any sense of the word."
Economists said the auction suggested that customers would continue to buy New Zealand dairy products despite the contamination issue, given that trade in whole milk powder, which is used in everything from confectionary to cheese on frozen pizza, is dominated by New Zealand product.
U.S. dairy futures fell on Tuesday, reversing a rise seen in the past few days as traders unwound speculative bets that China may shun some dairy products from New Zealand, and instead purchase products from other countries, including the United States.
Separately, Fonterra said it had been fined NZ$900,000 ($705,000) by China's top economic planning agency after a review of pricing practices for consumer dairy products in mainland China.
Fonterra said it accepted the findings and that the investigation had given it a much clearer understanding of expectations around implementing pricing policies.