Holding costs dairying's challenge

Keeping costs down could be the major challenge dairy farmers face in retaining New Zealand's edge in global dairy markets.

Buyers had been making tougher conditions for food safety, sustainability, traceability and animal ethics and the list would grow, said Rabobank dairy research director Hayley Moynihan at the SIDE conference this week.

Milk-production costs were up "everywhere", she said, and, with milk prices increasing to an expected $7 a kilogram of milksolids - about US50 cents a litre - other countries could be expected to want to supply this market.

However, the cost advantage New Zealand used to enjoy against competitors such as Australia, the United States and the Netherlands had narrowed.

"New Zealand needs to stay below production costs in California or it will be constrained by how much it can grow," she said.

"Otherwise, we will become unprofitable and other suppliers will supply the world market more cheaply."

New Zealand's mainly grass- based system meant farmers did not have the same high feed costs as intensive US feedlots, but fertiliser costs were higher and Kiwi farmers had big interest payments on debt.

World estimates were for milk exports to rise from 60 billion litres to 84 billion a year by 2020, but New Zealand was not expected to produce more than an extra 3 billion litres, depending on irrigation development and land-use competition.

Much of the growth in milk exports was expected to come from the US and Europe, with lower- cost producers unable to lift their supply substantially.

The milk price would have to be high enough for the world to get more milk, but buyer resistance increased when wholemilk powder was at US$3500 to US$4000 a tonne, Moynihan said.

"So there are not many buyers at US$5000/t and that's why prices come down. From a New Zealand perspective, we shouldn't expect to see another substantial jump in powder prices. The trading range will vary, depending on the currency and global growth.

"The market is looking for growth, but at prices similar to those of the last five years."

New Zealand was able to cope with volatile prices, but struggling competitors would catch up.

Farmers would have to get better at meeting market expectations to position themselves in premium markets, she said.

In New Zealand's favour were its export focus and the fact that farmers owned much of the dairy processing, with operating costs kept stable because of grass systems. Added to this were weak competition for land from other users, global markets hungry for milk and legislation allowing the large Fonterra structure.

However, overseas rivals were adopting some of these strengths.

"Industries offshore are looking at the New Zealand industry and supply chain and are saying, 'That works and how do we replicate that'. That is what we are up against, with competitors looking at what we are doing and we are approaching the thin edge of the wedge."

China, Southeast Asia and the Middle East wanted more New Zealand milk, while India swung from being an importer and exporter, depending on its domestic needs.

The main milk trade at this stage was from North America to Mexico, Europe to Russia, Europe to Africa and the Middle East and New Zealand to China. Milk prices had risen because exports were down about 3 billion litres during the last few months as a result of the drought and other issues.

However, Rabobank expected there would unlikely be much of a price lift until next year.

Future suppliers were expected to be Australasia, North America and Europe and Brazil, Argentina and Uruguay, as long as they could deal with weather changes, production costs, land-use competition and regulatory changes.

The Press