09/08/2014
TOUGH TIMES: International dairy prices have falled 40 per cent since the start of the year.
The golden days could be over for New Zealand's dairy industry, which faces flat milk prices and slower production growth over the next 10 years.
This will create challenges for Fonterra, dairy farmers and the wider New Zealand economy, coming off a decade when production soared and the price of whole milk powder more than doubled.
But commentators say the industry is still in good shape despite growth constraints and increased overseas competition.
A recent study, the OECD-FAO Agricultural Outlook 2014-2023 report, looked at global dairy demand and production over the next decade.
It found that supply and demand would rise at roughly the same rate, 1.9 per cent per year, meaning the price boom since 2003 was unlikely to be repeated.
The report predicted that most of the major dairy commodities, including New Zealand's biggest dairy export, whole milk powder, would be flat during the decade and would actually fall slightly in real terms after adjusting for inflation.
"Nevertheless, real prices will be substantially higher than in the period before 2007," it states.
ASB rural economist Nathan Penny said while dairy farmers should not expect a repeat of the big price growth of the past few years, the flat forecast was off a high base of US$4000/tonne of milk solids.
Prices are now just above US$3000 after falling 40 per cent in the past six months.
The current price "is still very profitable for the majority of farmers", Penny said. "If those long-term forecasts play out, dairy in New Zealand will be in pretty good shape."
While prices were likely to be flat over the long term, there would be short-term volatility due to adjustments in supply and demand, he said.
Penny said farmers in the European Union and United States had significantly increased their production recently in response to strong prices, which had contributed to the subsequent dairy-price drops.
In the longer term, he said, much of the global growth would come from China, Brazil and India, which the OECD predicts will overtake Europe as the world's largest dairy-producing market within the next decade.
"India hardly exports at all. It's a pretty closed market and it's pretty hard to export there, hence why it's on the outside in discussions on the global dairy market.
"You would like to think India would open up over time and New Zealand is pursuing a free-trade deal with India."
The OECD report forecast milk production would increase by 2.7 per cent a year in China, 0.9 per cent a year in the US and a "sluggish" 0.5 per cent in Europe out to 2023.
It forecasts that production in New Zealand, the world's largest dairy exporter, will expand 1.9 per cent a year, less than half the rate of growth in the past decade, 4.5 per cent a year.
Fonterra's New Zealand farmers produced just under 1.6 million kg of milk solids in the 2013/2014 year, up 8 per cent on the previous season.
The report said production would be slowed by an appreciating exchange rate, increasing production costs and environmental factors that constrain milk output growth.
"Most of the growth will come from a further increase in the dairy herd, assuming that the mainly pasture-based, extensive milk production, implying a low yield per dairy cow, will be maintained."
Waikato University agribusiness professor Jacqueline Rowarth said New Zealand's dairy sector needed a complete rethink of how it marketed itself and its products internationally.
"I still think we need to do a better job in expanding the value of our milk. We are selling it as a commodity when it's not.
"We are just saying it's from New Zealand. We are not selling any of the advantages such as higher Omega 3 levels in pasture-based milk."
Rowarth said New Zealand needed to market its milk as "free range" to take advantage of the country's unique pasture-based system and the positives consumers associate with it.
Products marketed as free range and organic sold at a significant premium, she said.
"If people want to buy free range they have got to pay more. It's difficult to make money from the range farming way unless you inherited your farm and don't have any debt."
Federated Farmers national president William Rolleston said rising costs were a big issue for New Zealand dairy farmers.
"We used to be the cheapest, most cost-effective place to do dairy and I'm not sure that's true any more. The message is dairy farming can't rest on its laurels.
"We have to continue doing good scientific research to keep ahead of the herd and ensure we have good, robust and safe tools to keep our costs down."
Rolleston said the dairy industry also needed to communicate effectively with New Zealand's increasingly city-dwelling population.
If the industry failed to tell a positive message it could be burdened with more taxes and regulations supported by urban voters concerned about issues such as "dirty dairying", he said.
"I think there's a pretty good appreciation from people within cities about how important agriculture is to our economy.
"What's not helpful is where organisations attack agriculture and dairy and discredit it and put it in a poor light for their own political means."
Fonterra declined to comment for this story, saying it would be inappropriate ahead of its September annual results announcement.