NZ's dairy industry 'losing its price edge'

Dairy farmers are losing their low cost advantage to other export competitors in the milk trade.

New Zealand's pasture-based system used to give them almost automatic right to being the lowest cost milk producers in the world, but they are down in the order as they intensify farming systems, says a Rabobank dairy report.

"At best New Zealand is in the middle of the pack now in terms of production costs and it does mean the competitive advantage is more reliant on efficiencies outside of the farmgate," said New Zealand and Asia dairy research director Hayley Moynihan.

"They are reliant on efficient processing and strong export markets and established supply chains."

Moynihan said Kiwi farmers had retained a clear advantage in global milk trading because of their market access, scale of New Zealand manufacturing plants and market-focused experience.

Competitors such as the United States were looking to replicate these advantages, however, and were focusing more on the export market and developing relationships with Asian buyers, she said.

US milk from more intensively produced farms used to come and go on the market depending on feed prices and milk prices.

"Increasingly they are coming because the export market is providing more attractive returns than the domestic marketplace. The conclusion from that is we will see more competitors in the future and beyond the farming gate as well," said Moynihan, author of the report.

New Zealand farmers have lost ground from providing herds with more feed outside of pastures. Alternative feeds used to contribute 10 per cent of farm expenses 20 years ago and this has increased to 25 per cent.

Interest costs have risen because of high debt in the dairy industry as farmers made the most of low interest rates expected to eventually rise. Farm working expenses increased 72 per cent in 2007-08 on the previous season and interest cost rose 29 per cent and have remained around these levels since.

Debt has more than doubled in the past 10 years and amounts to the equivalent of $20 a kilogram of milk solids produced. Dairying has debt of $32 billion and carries the most agricultural debt.

Cost pressure is also expected to arise from increasing environmental demands on farmers, such as improving effluent ponds and fencing of waterways and potentially lowering stocking rates in some systems and modifying fertiliser loads.

Moynihan said farmers would be looking at ways to invest and future-proof their businesses to limit costs from environmental pressure and reduce their debt burden during a high milk payout.

"It's not only milk price volatility that farmers have to think about - it's production cost volatility as well because both can impact together and some years we can see the dual impact."

The weak US dollar has improved the competitiveness of the US in exporting and eroded the competitiveness of Australasia and other countries.

Asia, and particularly China, has grown stronger as a milk destination in the past year because of domestic production challenges such as climate problems and foot and mouth disease.

Moynihan said milk demand was still growing, but export supplies were set to increase next year as production increased in virtually all export regions except Australia. Despite this, milk inventories are unlikely to swell because buyers resisting high prices are expected to return to the market when prices likely ease by the second quarter of next year.

Wholemilk powder prices are at US$4800 a tonne from $5000/t a year ago and are off the peak of $6000/t six months ago. Skim milk powder has risen to nearly $4600 from $4500 a month ago.

The Press