The world consumed about 650 billion litres of all types of milk in 2018, of which New Zealand produced about 21b litres, he told the South Island Dairy Event.
Three-quarters of the growth will occur in south Asia, which is mostly closed to trade through tariff restrictions or other regulations.
However, NZ will continue to target about 400 billion litres of accessible consumption in more open nations.
Based on population growth, income growth and consumption patterns, a best estimate of 1.5% a year compound growth in the markets that matter to NZ adds up to another 31b litres of milk to be consumed.
China will account for at least a fifth of the growth and there will also be growth in the United States and Europe, where cheese consumption is rising even though fluid milk sales are falling.
“Young people in Europe, they say they don’t want to eat meat. Well, guess what, they’re eating cheese.”
Nevertheless, both the European Union and the US have production surpluses and are major exporters. The other big sphere of interest for NZ is southeast Asia.
Excluding China, the region has 650 million people and low dairy consumption, averaging about 20kg a person.
“They’ll be consuming another 2.5b litres and China another 7b litres over the next five years.”
In those importing countries the cost of milk is a lot higher than the cost of producing in exporting countries. Even though milk is a relatively expensive item for Asian consumers, producing it locally is generally not profitable.
In China, milk production is expensive, largely because of the cost of feed.
“China cannot feed its people and its livestock,” Rattray said.
“And it’s the same situation in all of Asia –very low-yielding cows still requiring a fair bit of feed and often still under-fed. It’s a very expensive production system.
“The gap between local production and consumer demand will only grow.
“It is forecast domestic industry will produce only about a third of the milk the region needs over the next five years,” Rattray said.
“There’s a 6.5b litres deficit or 1.5b litres per year that’s going to have to be filled by somewhere if the normal trend continues.”
Indonesia is an example of the deficit.
It has 260m people and very low dairy consumption but is growing quickly. Consumption per person was now, on average, about 14kg of milk equivalent across all products.
It produces about 600m litres of milk and consumes about 3.5b litres,so it imports 82% of its milk to bridge that gap.
Thailand, which has the most developed dairy industry in southeast Asia, has a 52% supply gap and is falling behind in its ability to supply its own people.
Across the rest of Asia, the China gap is 35%, Vietnam 75% and Malaysia 90%.
Import dependency doesn’t simply mean NZ can keep shipping more bags of whole milk powder or skim or drums of AMF.
But, because of the need to import product, milk in Asia is essentially manufactured or reconstituted in factories rather than delivered from farms. As a result Asian producers have excellent branding companies with sophisticated manufacturing.
But a manufacturer in Thailand, for example, has to weigh the cost of buying milk at 50-60c litre equivalent for milksolids against buying it off the world market for 40-45c, depending on whether it is skim milk AMF, whey power and vegetable fat.
“You can see the pressure that’s on those manufacturers and they absolutely prefer to use imported milksolids for any application that they can substitute into solid form.”
That is despite tariff regulation and other protection for local industry.
Retail affordability is also a big factor, he said.
“They haven’t got a huge population that can pay $6/litre equivalent. Most people are still on very modest incomes but dairy nutrition is very important.”
Rattray predicts growth in demand for fresh, pasteurised milk in Asia will probably absorb all the extra growth in domestic production.
“Everything else is going to need to be filled with imported milksolids.”
Worldwide, the ongoing risk in the balance of supply and demand is the ability of Europe to turn on milk production.
In 2014, when the world was swamped with traded milk, Europe increased production by 6b litres – a production lift of 4%.
The US was a lesser risk because it consumed most of its production while Asian manufacturers will continue to struggle with a shortage of local supply – and relatively high domestic production costs.
“They cannot utilise local milk at the cost of production from most of what they produce and they’re going to continue to demand imports.”
Rattray has held roles including the external monetary policy adviser to The Reserve Bank, chairman of the Dairy Companies Association, director of Fonterra and of the New Zealand Dairy Board. He has been closely involved with Canterbury Grasslands, a large-scale international dairy farming company in NZ and the US.
