However, there will be some challenges and volatility will still be a factor, because New Zealand’s production is almost entirely exposed to the global market, while competitors have big, stable domestic markets.
The challenges include rising land prices, increased environmental compliance creating tension with the desire to increase production, falling unemployment making workers harder to recruit, rising interest rates, rising inflation, a continuing high exchange rate, and competitors boosting production as supply and demand come into balance.
GROUNDS FOR OPTIMISM: Agrifax senior dairy analyst Susan Kilsby says the future is bright for dairy farmers.
Kiwi farmers were getting the best prices in the world this season for milk from their 6.6 million cows but could expect times when they would be the lowest-paid because of the industry’s complete exposure to global markets, Agrifax senior dairy analyst Susan Kilsby said.
She forecast prices would be about $6.40/kg MS for 2014-15 and $6.60 for 2015-16. ANZ has the 2014-15 price at $7.10 and Westpac predicts $6.70.
Kilsby expected a $6-$7 range to become the norm for the next few years, driven by increasing costs in global production, so there should be no return to $4 payouts.
JPMorgan Australia warned last month the gross domestic product (GDP) growth of 1.4% in the third quarter last year was a correction, or catch-up, driven by agriculture, particularly dairy.
“Due to the one-off nature of the dairy bounce we are wary of assigning too much significance to the (GDP) acceleration,” it said.
The results realigned GDP growth with the tone of other indicators, it said.
“While it is good news that conditions have recovered quickly post-drought, clearly this is a supply-side event and it is not clear whether the dairy production bounce is yet touching the real economy.”
Statistics NZ said 0.9 percentage points of the 1.4% GDP increase, up from 0.3% the previous quarter, was attributable to agriculture and the strong increase in dairy production was the main contributor to a 17% rise in agricultural production, which makes up 5% of the economy.
Kilsby said the biggest factor in the next few years would be an increase in global production pushed by the current high commodity returns.
European milk prices were at an all-time high and United States prices had started to improve but had been slower than the rest of the world because domestic prices were lower than global prices.
The record US corn harvest meant the margin between feed and milk would improve considerably this year, she said.
European Union quotas had been increasing by 1% a year but come off in 2015 and some countries had been gearing up milk production to take advantage, she said.
“The Irish will blow their quota out of the water this year and pay the fines. The returns are so high they can afford to do that.”
Milk production in the EU was growing by about 4% a year and that additional milk equated to about 25% of NZ annual output, she said.
“Demand has been growing quicker than supply but it looks like they are coming back into balance.”
Susan Kilsby
Agrifax
“Demand has been growing quicker than supply but it looks like they are coming back into balance.”
Kilsby expected supply to catch up with demand in the middle of this year, followed by a period where supply grew quicker than demand.
The big unknown in all this was China and how quickly it recovered from a big dip in production last year last year, she said.
The Chinese were being coy about the size of the dip but commentators put it from 6-20%.
Kilsby said the Chinese recovery wouldn’t be quick because of a big exit of peasant farmers with fewer than 10 cows.
Latest Statistic NZ figures show that in November China passed Australia as NZ’s biggest export customer, with 63%, or $774 million, of the month’s $1.2 billion of exports there made up of dairy products.
Total dairy exports in November were worth $1.7b, a record for any month.
The US, which a decade ago exported only 5% of its production, with most going to Mexico, now exported 15% and sold on the global market, Kilsby said.
However, if prices dropped too low for too long the US would stop supplying.
“That’s massive supply coming in and out of world markets.”
The Trans-Pacific Partnership was also another uncertainty but in theory should be positive for Kiwi exporters, she said.
However, it would depend on how far the US and Canada lowered their trade barriers. And even if they did make it easier to sell into their markets, domestic producers were still supported by huge subsidies.
Despite the challenges Kilsby said the future was bright for Kiwi dairy farmers provided they keep debt and input costs under control.
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