ASB senior rural economist Nathan Penny opted for 2% growth in future, saying that in his view the days of 4% average growth rates were gone.
Over a decade those high rates of annual growth had been driven by access to cheap and available irrigation, especially in Canterbury, high dairy returns compared with other land uses and a structural lift in world dairy prices because of demand from China.
During the decade average dairy farm indebtedness had increased from about $10/kg of milksolids produced to more than $20.
Penny believed those expansionary factors were no longer present now world dairy prices had improved.
Easily converted land and water access were not available, no apparent structural lift in dairy demand was likely until India entered world markets in a big way, competing land uses were doing well and family-run dairy businesses were constrained for capital.
Add in the greatly increased environmental constraints and compliance costs and NZ dairying was headed for a higher cost of production in comparison with other countries.
“NZ will take a smaller share of global dairy growth in future.
“Look at the comparatively modest 3% milk supply increase forecast (by ASB) this season.
“Following an unprecedented consecutive two seasons in which NZ milk decreased, farmers are not able or willing to boost production again.”
More modest growth from NZ would help to lift world prices though they would still be volatile.
It might also see a return to farm consolidation and expansion, a prior trend that had been parked for the past seven or eight years.
AgriHQ dairy analyst Susan Kilsby told the seminar that NZ milk production growth would be limited to productivity gains – about 1.5% average annually.
Farmers would make more milk from fewer cows using technology but they were going to pay higher costs for that technology, for labour and environmental requirements.
The uncertain returns would lead to reduced confidence and flow-on to less investment, she said.
In addition, the change of government would reduce overseas investment and immigrant labour, lift the minimum wage and maternity leave, put agriculture into the Emissions Trading Scheme (at an initial cost of about 2c/kg/year) and require more effort to improve water quality.
Penny also commented on the volatility of world dairy prices leading to distortions in price signals to NZ farmers.
The delayed seasonal payment system practised by Fonterra meant farmers’ behaviour was sometimes contrary to world price signals so that NZ supply responses got out of line with demand.
Quarterly milk pools, wrapped up and paid within four months, would provide clearer signals to farmers, Penny said.
