PASTORAL AGRICULTURE: The Competitive Edge

The New Zealand Dairy Industry

Introduction

The New Zealand dairy industry began in 1814, with the importation of two cows and a bull. In 1871 the first co-operative dairy company was formed to make cheese, and 1882 saw the first refrigerated shipment of butter to Britain. Throughout the history of the dairy industry, innovation and technology have played an important part in its success. Early innovations included the introduction of cream separators in 1884 and mechanical milking machines in the 1890s. The ethos of continuous improvement still pervades the industry, from on-farm production through processing and product development, to the marketing of New Zealand dairy products.

structure

Farms

In 2002 New Zealand had a total of 13 600 dairy farms. The "average" New Zealand dairy farm was 103 hectares, milking 271 cows to produce 997 000 litres of milk containing 84 400 kilograms of milksolids. In the last twenty years, the number of dairy farms has fallen, but the average farm and herd size has increased. Productivity per hectare and per cow have both substantially improved.

The main dairy farming area of New Zealand are in the northern and western parts of the North Island. There are 5840 herds in the Auckland/ Waikato/ Bay of Plenty region, 2270 in Taranaki and 1365 in Northland. These are warm areas, with reliable rainfall and fertile soil.

The vast majority of New Zealand dairy herds (97 percent) supply milk seasonally for manufacturing. Cows are milked in spring, summer and autumn, but dried off in winter when pasture production is lower. The remaining three percent of the herds supply milk year-round for the domestic liquid milk industry. The seasonal milk production system relies predominantly on highly productive, rotationally grazed pasture and herds of high genetic merit. It is this system that enables farmers to produce milk substantially below average world costs, giving New Zealand its advantage over competitors world-wide. The warm climate and productive pastures enable herds to graze in pasture year-round, thus avoiding the need for indoor housing and expensive feed supplements.

The majority of New Zealand dairy farms are owner operated. In addition, there is an established sharemilking system, under which a sharemilker is contracted to milk the herd and carry out a range of farm duties for a share of the milk income. This system is world-class, bringing trained, progressive young people into the industry and allowing them to build equity and proceed to farm ownership. Sharemilkers milk 38 percent of New Zealand dairy herds. Two-thirds of them are in a 50:50 agreement, with the sharemilker providing the cows and labour in return for 50 percent of the milk revenue.

Processing

calves feeding The milk produced by nearly all New Zealand dairy farmers is supplied to their co-operative manufacturing dairy company. These companies are owned by the dairy farmers that supply them. Farmers are paid monthly for the milk they supply, based on an estimate of returns made from the milk and from the products into which it is made. A final payment is made at the end of the season to reflect actual returns. There are currently three core companies operating in New Zealand - Fonterra Co-operative Group Ltd (Fonterra), Westland Co-operative Dairy Company (Westland) and Tatua Co-operative Dairy Company (Tatua).

The biggest is Fonterra, which is owned by 12 600 farmers. It collects 97 percent of New Zealand milk production. Fonterra was formed in 2001 out of a merger between New Zealand's two largest manufacturing dairy companies - The New Zealand Dairy Group of Companies Ltd and Kiwi Co-operative Dairies Ltd - and the New Zealand Dairy Board (Dairy Board). Westland has around 370 suppliers and produces around two percent of New Zealand's milk supply, while Tatua's 130 suppliers provide most of the remaining one percent.

As well as these bigger export-orientated companies, there are also around 70 smaller companies operating in product or regional market niches in New Zealand.

The concentration of New Zealand's dairy industry represents a dramatic change from the pre-war situation when there were over 400 companies, reflecting improvements in transportation and advances in efficient, larger-scale processing technologies.

Marketing and Trade

As a result of New Zealand's relatively small population and small domestic market for dairy products, around 93 percent of manufactured dairy products are exported. Prior to the deregulation of the industry in 2001 all exporting of dairy products was carried out by the Dairy Board, or under a licence issued by the Board. In the deregulated environment individual dairy companies carry out their own international sales and marketing.

Fonterra is the world's largest single exporter of dairy products. It is a major world player in dairy ingredient exports such as milk powder and casein, and in consumer products. Its international brands include Fernleaf and Anchor, as well as speciality products such as ANLENE and ANMUM which are leaders in their markets. Fonterra has a wide range of international marketing subsidiaries, joint ventures and other arrangements, including in the US (with Dairy Farmers of America), North and Latin Americas (with Nestlé) and in the UK and Europe (with Arla Foods).

Although New Zealand produces a relatively small proportion of the world's total milk, its share of world dairy trade is far more significant. Only around five percent of world production is traded (excluding trade within the European Union) owing to trade barriers of various types.

The EU (34 percent), New Zealand (33 percent) and Australia (13 percent) together provide 80 percent of dairy products traded on world markets. Excluding intra-EU trade, New Zealand is the world's largest exporter of butter, skimmilk powder and casein, and the second largest exporter of cheese and wholemilk powder.

New Zealand achieves its second place in the exporting of dairy products without relying on production or export subsidies, and without protecting its domestic market from overseas competition. New Zealand's main markets are the US, Europe, Asia and Latin America.

Dairy output has expanded rapidly over the past decade owing to improvements in productivity, and the conversion of other types of farms to dairy farms, particularly in the South Island in recent years. In the 10 years to 2002, the quantity of milksolids processed rose by around 60 percent.

Output of Major Dairy Products 1999-2003 (tonnes) (May years)

Cheese	Butter



Wholemilk Powder	Skimmilk Powder and Buttermilk Powder

Sources: Fonterra Co-operative Group Ltd; Westland Milk Products; Tatua Co-operative Dairy Company Ltd; Statistics New Zealand; MAF.

New Zealand's Dairy Exports, year ended June 2002 ($7.1 billion fob)
	Outlook The outlook for the New Zealand dairy industry appears bright. Increased efficiency is expected to lead to increased production, and exports are expected to increase in response to increasing demand in a growing world economy, expanding market access owing to a lowering of trade barriers, and the reduction of export subsidies in the world's markets.
Source: NZ Dairy Board and SONZAF