Thursday, March 28, 2024

Milk production forecast to decelerate

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Milk production in New Zealand is forecast to continue to expand in the coming decade but at a considerably slower rate. In the 10 years to May 2014 milk production increased at an average of 6% a year, but that is expected to slow in the next decade. The AgriHQ NZ Dairy Report forecasts milk production will expand at an average annual rate of just 2% in the 10 years to 2024.
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Several factors are expected to contribute to a slow-down in industry growth. Global demand for dairy products is expected to grow at a slower rate, the cost of operating dairy farms is expected to rise in response to tighter environmental legislation, and industry confidence has been eroded. 

Economic conditions are weak or are weakening in many parts of the world. The economies of both the United States and the European Union remain fragile and therefore are unlikely to support strong growth in dairy consumption. This is important because any milk produced but not consumed in those countries must be exported into the same markets that NZ sells product to. 

China is by far the most important importer of dairy products. China’s economy is decelerating although still moving along at a rate most countries can only envy. As this market matures it is much less likely importers will over-buy as they did a couple of years ago. Purchases are now much more considered and more closely aligned with consumer demand. 

Russia – once the largest buyer of dairy products and until recently the second-largest buyer – is unlikely to attain that title again. Russia’s economy is worsening by the day, so by the time they lift restrictions on dairy imports they are unlikely to be able to afford them.

The Middle East North Africa (MENA) region and Asia are now the key importers of dairy products. NZ has done well to grow its share of the MENA market but it will become increasingly difficult to hold this. Europe is expected to continue producing more milk than it needs and the logical export destination for this milk is MENA. European exporters are now also much more active throughout Asia and this situation is unlikely to change.

NZ farmers are unlikely to experience another extended period of super high milk prices like 2014 unless global milk supply is severely restricted by a weather event such as drought. Now that European farmers are free from quotas there should be a much quicker milk supply response to high global dairy commodity prices.

NZ milk prices will continue to be volatile. The latest period of extreme volatility has knocked industry confidence. Therefore any dairy output expansion plans, be it a larger farm, additional stock, or investment in pasture improvement or supplementary feed are likely to be considered a little more carefully than in the past decade.

The bar for environmental standards continues to be raised. At this point it is unclear what the end goal is and the path needed to reach it. Regulations will vary from region to region and farm to farm. It’s difficult to assess exactly how changes to environmental rules will impact farms, but tighter regulation will almost certainly increase costs. Any additional costs need to be offset by obtaining higher prices for this country’s products, ie selling the NZ clean, green story. 

A deceleration of growth in the dairy industry isn’t necessarily bad. One reason most milk in NZ is processed into dairy commodities rather than value-add products is dairy companies, particularly Fonterra, have struggled to build enough processing plants to manage the ever-expanding milk flow, let alone invest in value-add products. In recent seasons Fonterra’s milk supply managers have been faced with trying to process a peak wave of milk of tsunami proportions. 

If NZ’s milk production growth slows we will lose market share and face more competition in certain markets. But it also means Fonterra could be more selective about the markets it does business in. Success would depend more on the quality of product and service delivered.

Onfarm we expect a similar shift in sentiment with more focus on operating a robust, sustainable farming system that is able to deliver profits in both high and low milk price seasons. 

• Look out for the AgriHQ NZ Dairy Report on the AgriHQ shop: https://agrihq.co.nz/shop/product/60

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