Since 2006 the US has increased its exports fourfold as its dairy industry looks to global markets as a positive marketing strategy rather than simply a way to dispose of surplus milk as it’s done in the past.
Moynihan told a series of meetings in the South Island in November the US will export 8 billion litres milk equivalent (LME) through this year, just short of Australia’s total milk production and has increased its total production by 14b LME over the past decade.
It’s been particularly successful in plugging any gaps left by NZ and has increased its sales relative to NZ growth in a number of significant Asian dairy markets such as Vietnam, Japan, Korea and Indonesia. In some of those markets it’s now exporting greater quantities of dairy products than this country.
NZ exporters have held on to their big key markets in China and the Philippines but the US is knocking on those doors too.
Moynihan said the US was keen to keep filling gaps and NZ was going to have to be careful it only left open space in markets it could afford to have the US jumping into. NZ’s inability to meet growing demand on its own backs up Fonterra’s strategy of building supply behind borders as it’s doing in China with continuing expansion of its farming enterprise there.
Moynihan said NZ needs to continue to focus on its competitive strengths such as producing high quality product, maintaining and developing its strong trade relationships and its technical manufacturing capabilities alongside the industry’s cost competitiveness. But she warned that dairy producers here should be wary that the growing use of imported feed in NZ dairy systems will only serve to narrow the production cost gap with the US. Kiwi farmers going down that track will face the same risks to profitability from rising feed prices as their US counterparts.
She cautioned farmers that threats from the US were not to be found just in the $US exchange rate but in the development of a stronger US export-driven strategy.
But that’s not to say US dairy farmers, processors and exporters won’t face headwinds, as they too are still struggling with the impacts from their summer drought and its effects on feed prices, the continuing economic woes that are holding demand growth back and the fact producers’ pricing signals aren’t based on what’s going on in the world market but are still dominated by domestic pricing.
But the signs are there that conditions are changing going into 2013, with feed prices gradually falling away from their recent highs and milk prices edging up to where the income over feed costs benchmark is approaching the US$8/hundredweight (cwt) breakeven point past which production growth is likely.
The expired US farm bill continued to cast a shadow over producer confidence and held its own threats of supply management where farmers would be required to ramp down production if they want to access support mechanisms.
Looking out to 2020, Moynihan said global whole milk powder (WMP) prices are expected to fluctuate between US$3800 and $3300/tonne. Dairy demand growth is still expected to be at around 2.4% on a compounding average growth rate (CAGR) basis with developing countries likely to be higher than this and developed countries lower.
In 2011 global dairy products totalled 59.2b LME but by 2020 that’s likely to hit around 85b LME.
NZ is only predicted to be able to increase its production by around 3b LME over that period due to environmental and financial constraints, with future growth more likely to come from production/cow increases than from increasing cow numbers. Australia too is only expected to be able to help out with an additional 1.8b LME.
When likely growth from known dairy regions is tallied up the world will need to find around 15-20b LME more if its to meet demand and it will be countries such as the US and to some extent some countries within the European Union (EU) following the abolition of quotas that will step into the breach.
Those EU countries such as Ireland will be able to ramp up quickly but they’re not expected to force a wave of milk onto globally traded markets.
Moynihan said global prices would need to be high enough to attract investment to produce additional milk in the medium cost production regions but stay below the extreme highs that burn off demand or attract high cost milk production.
