Situation and Outlook for New Zealand Agriculture and Forestry (August 2008)
19 Dairy
The dairy payout, in inflation-adjusted terms, is the best since 1965. For the year ended 31 May 2008, the payout1 is estimated to be $7.55 per kilogram of milk solids.
In the year ended 31 March 2008, dairy export revenues grew by 25 percent to $10 billion. International prices for dairy products have been exceptional, overwhelming the impact of the strong New Zealand dollar and the drought on New Zealand dollar dairy export revenue. However, high international dairy prices are now declining from their peaks.
Growth in demand, for milk powders especially, has come from China and other developing economies and particularly from oil-exporting countries enjoying higher income flows. For the year ended 31 March 2008, the Organization of Petroleum Exporting Countries (OPEC) accounted for 21 percent of New Zealand’s total dairy export value (up from 17 percent the previous year). While milk reconstitution from imported milk powder has been a major part of the overall demand, there is also growing demand for higher-value consumer products, such as cheese and yogurts.
A number of significant disruptions to supply in the last two years helped keep international prices high. Initially, exports of skim milk powder from the EU declined due to Common Agriculture Policy changes in 2003. This was compounded by two years of drought in Australia, reducing its milk production. Here in New Zealand, milk solids production fell in late summer 2008 due to the drought.
Looking ahead
During 2008 and 2009, weaker world economic growth is likely to mean lower demand for dairy products. However, oil prices show no sign of declining, so demand from oil-producing countries should remain strong.
In New Zealand, milk production and manufactured exports are forecast to steadily increase, and a recovery in Australian milk production is likely. Dairy production in the US is expected to rise due to increasing yield per cow. The EU raised milk production quotas by 2 percent for the year ending 31 March 2009. The rise in quota is equivalent to 19 percent of New Zealand’s forecast production in the year ending 31 May 2009. Dairy production is also expanding in developing countries, particularly China, India and some South American countries. Export trade between these countries is also on the rise.
International dairy prices are expected to continue falling back from the peaks achieved in early 2008, as supply expands. The strong demand is expected to be sufficient to ensure that international dairy prices remain significantly higher than pre-2006 levels.
In New Zealand dollar terms, FOB export prices are expected to fall from the second half of 2008 and throughout 2009. The expected assumed weakening of the New Zealand dollar will not entirely compensate for falls in international prices.
The weighted average payout across the companies is estimated (net of the industry goods levy) at $6.90 for 2009. For later years, the payout is expected to average around $6.00, which is significantly higher than the five-year average up to 2007.
Exports
New Zealand is the largest dairy exporter in the world right now and the eighth largest milk producer, averaging 2.2 percent of world milk production for 2005 to 2007. There has been a continuing trend towards dairy powder exports, especially whole milk powder, casein and ingredients. Dairy export volumes by product are shown in Figure 19.3.
New Zealand’s total dairy export value continues to climb on the back of rising prices and production. For the year ended 31 March 2008, dairy export value rose 25 percent to $10 billion from the previous year, while volume fell 7.0 percent because of the drought. Looking ahead, export value is projected to rise 14 percent to $12 billion in the year ending 31 March 2012. This expansion reflects a depreciated exchange rate, rising cow numbers and increasing milk solids production per cow.
Table 19.1: Dairy production, payout and export value, 2005–2012
| Actual | Forecast | |||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
| Cows and heifers in calf or in milk1 (mil) | 4.10 | 4.12 | 4.14 | 4.17 | 4.39 | 4.52 | 4.59 | 4.67 |
| Milk solids produced2 (mil kg) | 1 213 | 1 270 | 1 314 | 1 272 | 1 370 | 1 424 | 1 461 | 1 501 |
| Average payout (cents/kg of milk solids)2, 3 | 455 | 407 | 447 | 755 | 690 | 578 | 598 | 632 |
| Total export value ($ mil)4 | 6 266 | 6 807 | 8 404 | 10 478 | 12 044 | 10 471 | 10 887 | 11 897 |
Notes
1. As at 30 June.
2. Year to 31 May.
3. Net of industry levy and retentions.
4. Year to 31 March.
Sources Statistics New Zealand, Fonterra Co-operative Group, Tatua Co-op Dairy Company, Westland Co-op Dairy Company and MAF.
Figure 19.1: Skim milk powder export volumes, by major exporter, 2000–2007
Note
1. EU27 refers to the countries in the European Union as at 1 January 2007.
Sources US Department of Agriculture, EuroStat, Statistics New Zealand and Dairy Australia.
Production
The effect of the drought in the North Island has caused an estimated 3.5 percent drop in total milk solids production for the year ended 31 May 2008. Without the drought, this was expected to increase by 2 to 3 percent. In coming years, production is expected to rise as dairy cows and heifer numbers increase and milk solids yield per cow grows. While the actual size of the herds will increase, the overall number of herds is declining. This supply response reflects high dairy payouts compared with alternative pastoral farming, such as lamb, and the drive for economies of scale and profitability.
As at 30 June 2007, 4.2 million dairy cows and heifers were in milk or in calf – up 0.7 percent on the previous year (see Table 19.1). Total dairy cattle numbers increased by 1.8 percent, reflecting the replacement of more heifers for dairy farm expansion. The South Island continues to drive the expansion and now accounts for 31 percent of total New Zealand dairy cattle numbers.
The recent drought hit New Zealand from late spring 2007 through to autumn 2008. Waikato, the dairy heartland, suffered its driest conditions in living memory. Lower milk production in January was a direct result of the drought’s early onset in November 2007. Cows were dried off early in the worst-affected areas. Demand for supplementary feed increased for drought-affected areas across the country.
Figure 19.2: Dairy export prices in US dollar terms
Notes
1. USD – US dollars.
2. FOB – free on board: the value of the goods at the port of export and loaded onto a vessel for transportation out of the country of origin.
Source Statistics New Zealand.
Figure 19.3: Dairy export volumes, by product, year ended 31 March 2008
Source Statistics New Zealand.
1 Averaged across dairy companies and net of industry levy and retentions.
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