Media Release August 30, 2012
Slower growth in the land of milk and money
The New Zealand dairy industry has ridden a wave of growth, with milk production increasing by almost 50 per cent over
the past decade. However constraints are expected to slow the rate of future growth, according to a new industry report.
The report, NZ Dairy – From a torrent to a trickle, by agribusiness banking specialist Rabobank, says that with New
Zealand emerging as the worlds largest dairy exporter alongside the European Union, it has led many to question just how
much more milk the country can produce.
Report author, Rabobank senior analyst Hayley Moynihan says the development of new dairy farms and processing
facilities has been fuelled by a combination of good returns, increased capital investment and strong asset growth.
“Over the next decade, growth will no longer be driven by increasing the number of dairy cows in the national herd, but
by productivity improvements as farmers strive to extract greater production per cow,” she says.
The growth of milk and money Over the past decade, Ms Moynihan says, the relative economic returns for dairy compared to
other agricultural industries has largely driven the change in land use. “The structural increase in the global milk
price was behind much of the change in land use from sheep, beef and cropping operations towards dairy farms,” she says.
“And this trend has seen a significant lift in production in the South Island, with the south now accounting for 36 per
cent of national production, up from around 15 per cent ten years ago,” she says.
Ms Moynihan says growth in the sector was also underpinned by the readily-available access to credit. “Dairy farmers
were generally able to service a greater level of debt than their drystock or cropping counterparts, with capital asset
growth historically providing the equity to build, or to leverage from, for further expansion.”
Constraints starting to bite Looking forward, the Rabobank report says the factors underpinning recent growth in dairy
will become less relevant over the next ten years, while new constraints will affect production. Ms Moynihan says that
with New Zealand dairy operations becoming increasingly intensive, feed and interest costs have become embedded in
production systems.
“While production is largely based on an extensive pasture-based system, farmers have increased output through growing
more feed on existing or purchased land or by buying in supplementary feed and this has structurally increased their
cost base,” she says. “As a result, fertiliser, feed, wages and interest costs now comprise almost 70 per cent of net
dairy cash income, up from 40 per cent in 1999/00.”
Ms Moynihan says these increased costs have reduced dairy producers ability to weather a downturn in the market. The
tightening of environmental regulations is also seen as a constraint to future growth, and, while regulations vary by
region, consent is increasingly required around nutrient use, effluent treatment and disposal, management of existing
waterways, stock wintering policies and water usage. Outlook – from a torrent to a relative trickle New Zealand milk
production is likely to grow at a far slower pace over the next decade than has been evident over the past two, the
Rabobank report says.
“While forecasted growth of 30 per cent over the next 10 years is considered rapid by most industry measures, it will be
pedestrian by recent New Zealand standards,” Ms Moynihan says. “The heady days of more than 300 new farm conversions
nationally in a single season are over.
While a window of opportunity is likely to remain for a while yet in Canterbury on the back of their irrigation
developments, future growth is likely to come from increased production per cow.” The industry is also expected to
mature in other ways, as economies of scale through the amalgamation of smaller farms continues to occur, as well as the
„corporatisation of dairy farms.
Ms Moynihan says that the changes in the dairy industry will require a shift in focus. “Farmers will need to look at how
to squeeze productivity gains from their existing herd, as well as ways to control their costs,” she says. The decline
in production growth will also present challenges for those further up the supply chain. “Processors and exporters will
be facing a milk pool that is nearing its limits as well as, the loss of cheap raw material, which will see them further
define their strategies,” she says. This will also have ramifications across the global dairy market.
“Importers reliant on New Zealand product are likely to seek greater breadth in product origin, while competing
exporters may see opportunities if New Zealand exports are unable to keep pace with growing demand.”
Ms Moynihan says the timing of the slowdown in New Zealands milk volume growth may well prove complementary to global
market dynamics, as additional production is expected out of the EU as their quotas are removed in the latter part of
the decade. Rabobank New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and
agribusiness banking. Rabobank has more than 110 years' experience providing customised banking and finance solutions to
businesses involved in all aspects of food and agribusiness.
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