No longer low-cost milk ‘down under’ – Rabobank dairy report
The traditionally low-cost pasture-based dairying regions, such as New Zealand, have lost their cost advantage as input
prices have risen, and now compete on the global market with a similar cost of production to producers with more
intensive farming systems, according to a recently-released industry report.
In the report, No longer low-cost milk ‘down under’, agricultural banking specialist Rabobank says global milk production costs have converged between dairy-exporting
countries, as the traditionally low-cost milk producers have seen their production costs rise, off the back of volatile
global feed prices and the increasing use of feed in traditional pasture-based regions.
Report author, Rabobank director of dairy research, New Zealand and Asia Hayley Moynihan says New Zealand milk producers
will need to structure their businesses and production systems to withstand ongoing high price volatility – for both
dairy commodity prices and inputs.
Ms Moynihan says lower-cost regions, like New Zealand, have already “largely capitalised their efficiency gains in a
high milk-price environment into the price of land and other assets”.
Therefore there is a need to adapt to this loss of absolute competitive advantage in milk production as efficiency gains
become more difficult to obtain.
“It is likely that optimal supply chain efficiency could at least partially mitigate this loss,” she says.
“Efficiencies achieved downstream in milk processing and marketing via a strong route to market and established supply
chain relationships will likely play a greater role in differentiating competitive export companies and industries into
the future.”
Ms Moynihan says to ensure that competitiveness is based on more than just the cost of producing milk, the New Zealand
dairy industry will need to work hard to ensure that it stays ahead of the pack in supply chain efficiency, market
access, marketing and sensible regulation.
Global milk production costs converge
Historically, countries in the Southern Hemisphere have been well known for their low-cost dairy exports.
Ms Moynihan says that extensive pasture-based production systems, plentiful natural resources and low opportunity costs
in alternative land uses gave this region a competitive advantage. Media Release November 27, 2013
“Countries such as New Zealand and Australia had abundant milk production, relative to the demands of their small
population base. Recognising that exporting was not a discretionary activity for them, they developed focused export
strategies.
“By contrast, dairy sectors in the EU and the US were highly regulated, resulting in production costs at least 50 per
cent higher than the Southern Hemisphere as recently as 10 years ago.”
However, Ms Moynihan says that between 2002 and 2012, the local currencies of New Zealand and Australian dairy exporters
have strengthened 75 and 90 per cent respectively, against the US dollar, accelerating the convergence of production
costs and making US exporters relatively more competitive.
Traditional low-cost producers lose their edge
The cost of producing milk in typically low-cost extensive pastoral production systems, such as those found in countries
in the Southern Hemisphere, has increased since 2002.
Ms Moynihan says producers in these lower-cost export countries have enjoyed buoyant returns and capitalised them into
high valued assets, primarily land, bringing on-farm production costs to levels similar to those in intensive feed-based
dairy systems.
“Productivity, in terms of feed produced per hectare, has increased but this has been well outpaced by land prices,” she
says.
Furthermore, the Rabobank report says that farming systems in historically low-cost production regions have intensified
by lifting inputs, thereby increasing production, but at an additional cost.
New Zealand production costs step up a gear or two
The New Zealand dairy industry, most well-known for its low-cost production, has moved, perhaps irrevocably, to a higher
cost farming system, the Rabobank report says.
Ms Moynihan says the structural increase in milk prices globally and locally has driven the quest for increased
production, almost at any cost.
“The first signs were there in 2002 when , on the back of milk prices increasing 42 per cent over two seasons, farm
working expenses surged 33 per cent per kilogramme of milk solids produced,” she says.
“The reality check of a 32 per cent lower milk price in 2003, which remained at a similar level over subsequent years
soon saw expenses fall back into line.”
However, Ms Moynihan says the 72 per cent lift in milk prices in 2007/08, and higher prices on average in the years
following, brought a steep increase in production costs Media Release November 27, 2013
that show little sign of abating without a significant change in farming systems or an economic crisis.
Farm working expenses increased 72 per cent in 2007/08 on the prior season and interest cost rose 29 per cent with both
expenditure categories oscillating around these higher levels ever since, she says.
Additionally, higher interest costs per kgMS have been driven by New Zealand dairy farmers’ increased debt, not higher
interest rates, Ms Moynihan says.
“The significant increase in dairy land values over the past decade combined with an increased focus on land acquisition
resulted in aggregate farm debt across the dairy industry more than doubling since 2002 to almost NZD 20 per kgMS
produced,” she says.
New Zealand producers are likely to experience upward pressure on milk production costs over the coming years as they
are confronted by a rising interest rate market and the likely impact of future environmental regulations on farming
systems and milk production levels.
“Tackling environmental issues is likely to result in a variety of measures that may include increased infrastructure
on-farm, altering pasture management or decreased intensity of farming systems which all impact production cost
dynamics”.
New Zealand’s competitive advantages
Ms Moynihan says milk producers in New Zealand should consider where the competitive advantage lies for their own
operations.
“Increased exposure to the global dairy market for some milk producers and greater intensification on-farm for others
has added complexity to many dairy farm businesses,” she says.
“A flexible production system at a higher average cost may still be competitive if it provides resilience during a
downturn.”
With high volatility expected to continue for both milk prices and production costs, the ability to lower inputs and/or
costs during periods of abundant global supply would be a distinct advantage, Ms Moynihan says.
“Southern Hemisphere producers previously survived global market downturns for prolonged periods due to the size of
their absolute comparative cost advantage,” she says.
“With this cost advantage now minimal to non-existent, other strategies to survive the inevitable downturns – albeit
likely short-term – will be required.” Media Release November 27, 2013