Overcapacity might lead to increased competition between dairy companies for milk supply and more loyalty schemes and higher milk prices.
Competition for milk supply could take three forms – defending the status quo, aggressively recruiting new supply or expanding into new territory or buying production assets with milk supply attached.
Companies could add value to the restricted milk supply or seek to produce dairy commodities more efficiently at lower cost though both strategies carried risk, Higgins said.
Greater competition at the farmgate was a factor that would affect Fonterra, Open Country and Westland as the most exposed processors to adverse shifts in their existing supply base in relation to their plant capacity.
Farmers in Waikato, Southland and Canterbury were the most likely to benefit from increased competition, with three new plants in the pipeline over the next two years.
Higgins said milk supply growth would continue but at a lower rate than over the past 20 years, in which time volume had doubled.
Even with low world prices and bad weather, NZ farmers contracted milk output by only 1% last season.
This season would see a bounce-back of 2-3% growth.
But she did not expect more than 2% growth a year in the following four seasons.
Her reasons included an almost complete lack of new conversions and dairy farm expansions, environmental constraints and the need for resource consents, nutrient limits, lower-cost production models, limits on palm kernel feeding and lower farm value increases.
However, improved herd and pasture management would drive increased production.
That onfarm productivity growth was forecast to be 1.6% compounded annual growth over the next five years, mostly from increased milk yield per cow, not more cows.
But that was much lower than the 4.1% compounded growth of the preceding 20 years, when there were seven years of growth of 8-10%, including consecutive seasons in 2000 and 2001.
Higgins charted dairy company capital expenditure over five years from 2011-12 to 2015-16, totalling more than $3 billion by Fonterra and $800 million by its competitors.
“Capacity construction has run ahead of recent milk supply growth and appears to factor in stronger milk supply growth than we anticipate.
“In an environment of low milk supply growth as competition for market share intensifies, a key risk for the industry and worst-case scenario would be persistent plant under-utilisation leading to high overhead costs and – unless addressed – a rationalisation of manufacturing assets.”
Further value-added capacity worth $450m was planned by Fonterra over three years, Oceania was part-way through a $600m build at Glenavy and three more powder plants were planned by Happy Valley, Open Country and Mataura Valley.
Any more foreign investment would have to deal with greater milk procurement challenges.
The report was called Survive or Thrive – the Future of New Zealand Dairy 2017-2022.
