Situation and outlook for New Zealand agriculture and forestry (August 2007)
16 Dairy
Fonterra Co-operative Group’s announcement (in May 2007) of a provisional payout of $5.53 per kilogram of milk solids for the year ending 31 May 2008 represents the highest nominal dairy payout ever (in inflation-adjusted terms, only the 2001 and 2002 payouts were higher). Some commentators are speculating, on the basis of rising spot prices and their judgements about what may happen over the coming year, that Fonterra Co-operative Group’s payout may be over $6 per kilogram of milk solids.
The rise in skim milk powder and whole milk powder prices driving the payout has been spectacular – doubling for skim milk powder from June 2006 to May 2007. Butter and cheese prices have also risen steadily since July 2006 (see Figure 16.1). These prices are reported for spot sales and new or renegotiated contract sales. As such, they comprise only a small part of any one month’s average export prices.
Figure 16.1: International dairy spot prices, June 2001–June 2007
Source United States Department of Agriculture.
The main cause of the recent high prices has been the constrained supply of dairy commodities from key exporting countries.
The supply of powders onto international markets from the European Union (EU) fell due to a switch in production from powders to cheese as a result of changes to the Common Agriculture Policy in 2003.
The rise in international dairy prices was reinforced by the drought in Australia, particularly in Victoria where 65 percent of Australian dairy production occurs. Australian production data from 1 July 2006 to 30 April 2007 show the cumulative loss at 4.3 percent, and full-year (to 30 June 2007) dairy production is estimated to be down 7 percent.
Severe rainstorms in Argentina interrupted dairy production there.
The expansion of ethanol production in the United States (US), through the increase in the price of feed corn, has limited the ability of dairy producers to respond to high international dairy prices. In the past, the US supply response has limited rising international dairy prices.
Over the forecast period, New Zealand dairy export prices, expressed in US dollars, are forecast to peak in the March and June quarters of 2008 as forward contracted sales are realised. Dairy Australia recently forecast a further 2 percent production fall due to flow-on effects from last year’s drought. Further falls in EU milk powder exports are likely, and export availability from the US could be constrained by higher grain costs.
In response to the current high dairy prices, increasing export supply will come from New Zealand and other producers such as Argentina, Uruguay, Brazil, and the Ukraine. Domestic production in developing countries will also respond to the current high international dairy prices.
Exports of skim milk powder out of the EU will continue to slowly fall because of a change in the manufacturing mix. Milk production quotas and constrained export subsidies place an effective ceiling on EU exports.
In May 2007 Fonterra revised its forecast payout for year ending 31 May 2007 to $4.35 per kilogram of milk solids, citing increased international commodity prices, and announced a provisional $5.53 payout for the year ending 31 May 2008. Westland Co-operative Dairy Company announced a payout of $4.15 per kilogram of milk solids for 2007, with the expectation of a higher payout in 2008. MAF’s estimate of the weighted average payouts (net of industry good levy) for the three
co-operatives Fonterra, Westland, and Tatua Co-operative Dairy Company is $4.30 in 2007 and $5.50 in 2008.
Payouts are projected to remain above $5 per kilogram of milk solids due to higher export prices (in US dollars) and an assumed depreciation of the New Zealand dollar.
Rising incomes in developing countries and a change in preferences to protein-based foods will mean upward pressure on dairy product prices. In China, a government-sponsored school milk programme will increase demand for domestic milk supply, as well as imported whole milk products, which are used in reconstituted milk. In addition, the programme will facilitate a generational shift in consumer preferences to dairy products.
OwnershipIn New Zealand, co-operatively owned dairy companies dominate manufacturing. The three main co-operatives are Fonterra Co-operative Group, Westland Co-operative Dairy Company, and Tatua Co-operative Dairy Company. The three co-operatives collected 95.3 percent, 3.2 percent, and 1 percent respectively of total milk solids produced in the year ended 31 May 2006. Twelve other companies collected and processed the 0.5 percent balance. Several new processing companies have recently entered or are seeking to enter the milk-processing market. These are generally investor-owned firms rather than co-operatives. The most significant of these to date is Open Country Cheese Company, which started processing in 2004 and has grown steadily over the last three seasons. |
Exports
Over the past decade, the contributions of whole milk products, casein, and ingredients have tended to increase in the export mix, with declining contributions from the remaining products. Dairy export volumes by product are shown in Figure 16.2.
Figure 16.2: Dairy export volumes, by product, year ended 31 March 2007
Source Statistics New Zealand.
New Zealand exported dairy products to 152 countries. Dairy export destinations by value are shown in Figure 16.3.
New Zealand has country-specific tariff quotas covering several dairy products across the EU, the US, Japan, Canada, and the Dominican Republic. Since its formation in 2001, Fonterra has had exclusive rights to these for initial periods, expiring progressively between 2007 and 2010. In May 2007, the Government announced a new policy framework that will allow a wider group of New Zealand dairy exporters the opportunity to export to these markets. To give effect to this new policy an amendment to the Dairy Industry Restructuring Act 2001 is required. The Government has announced its intention to introduce a Bill to Parliament for enactment in 2007.
From the previous year, New Zealand’s total dairy export value for the year ended 31 March 2007 increased 23 percent to $8.41 billion and export quantities increased 18 percent. Export values are projected to increase 39 percent to $11.68 billion in the year ending 31 March 2011, reflecting a depreciated exchange rate, increasing cow numbers, and increasing per-cow milk solids production.
Figure 16.3: Dairy export destinations, by value, year ended 31 March 2007
Source Statistics New Zealand.
Research and development
Under the Commodity Levies Act 1990, dairy farmers pay 3.4 cents per kilogram of milk solids, via their milk processors, to Dairy InSight. Dairy InSight is owned by dairy farmers. It funds research and development activities. In the year ended 31 May 2007, its total budget was $49.9 million, and the key areas of investment were biosecurity ($16.6 million), farming productivity ($12.6 million), and farming business ($7.3 million). Another dairy farmer-owned organisation is Dexcel, which carries out research and development. A merger of these two organisations has recently been proposed.
Production
New Zealand is the eighth largest milk producer, accounting for 2.2 percent of world milk production. As at 30 June 2006, 4.14 million dairy cows and heifers were in milk or in calf, up 0.4 percent on the previous year (see Table 16.1). While North Island numbers fell 1.2 percent, South Island numbers rose 5.1 percent and now account for 27 percent of the New Zealand total.
For the year ended 31 May 2007, milk solids production is estimated at 1314 million kilograms, up 3.5 percent on the previous year (see Table 16.1). The contributing factors are a slight increase in milking herd numbers, generally favourable climate conditions, and increasing use of imported palm kernel as a feed supplement. Production over the forecast period is expected to increase as dairy cow and heifer numbers rise and productivity per cow continues to grow. Existing dairy farms will expand along with conversions from other land uses, particularly as the dairy payout to lamb price ratio increases.
Table 16.1: Dairy production and payout
| Actual | Forecast | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | ||
| Cows and heifers in calf or in milk1 (mil) | 3.93 | 4.10 | 4.12 | 4.14 | 4.23 | 4.35 | 4.45 | 4.54 | |
| Milk solids produced2 (mil kg) | 1 254 | 1 213 | 1 270 | 1 314 | 1 336 | 1 384 | 1 433 | 1 486 | |
| Average payout2,3 (cents/kg of milk solids) | 421 | 455 | 407 | 430 | 550 | 518 | 504 | 522 | |
Notes
1. Opening number as at 30 June previous year.
2. Year to 31 May.
3. Net of industry levy.
Source Fonterra Co-operative Group, Westland Co-op Dairy Company, Tatua Co-op Dairy Company, Statistics New Zealand, and MAF.
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