NZ milk 'no longer low-cost'

New Zealand dairy farmers have lost a key competitive edge in the international market, a leading financial researcher says.

Rabobank director of dairy research New Zealand and Asia Hayley Moynihan authored the report No longer low-cost milk 'down under', which said traditionally low-cost pasture-based dairying regions, such as New Zealand, had lost their ''cost advantage'' because of increased input costs.

A 72% lift in milk prices in 2007-08 and continued high prices in the following years had brought about a steep increase in production costs, Ms Moynihan said.

The continued strengthening of the New Zealand dollar and increased labour and interest costs had seen the cost of production rise steeply, Ms Moynihan said.

The United States was now producing dairy as competitively as New Zealand, she said.

The New Zealand dairy industry had to look to other avenues to ''stay ahead of the pack''.

''Efficiencies achieved downstream in milk processing and marketing via a strong route to market and established supply chain relationships will likely play a greater role in differentiating competitive export companies and industries into the future,'' Ms Moynihan said.

Her thoughts were echoed by DairyNZ general manager of development and extension David McCall, who returned recently from the US, where he was investigating the issue. New Zealand lost its position as the cheapest producer of dairy about five years ago, Dr McCall said.

South American dairy farmers had emerged as the new lowest-cost producer and New Zealand dairy farmers were on par with those producers in the United States, Dr McCall said.

''The real issue is losing our competitiveness, the lowest cost is part of it, but it's not all of it,'' Dr McCall said.

''We are producing less for the dollars we are putting in. A lot of it has been driven by on-farm inflation.''

Since 2008, on-farm inflation had run ''well ahead'' of the consumer price index, he said.

Most of the costs had been fixed costs and there was very little farmers could do about it, he said.

However, farmers needed to ''keep their eye on the fundamentals''.

''They need to keep themselves in a good position and not take on too much debt when the times are good. Just because the milk prices are higher they can't lose sight of their business,'' Dr McCall said.

Further intensification would not help the problem as ''the cost of putting up a barn in the [United] States is 40% of what it is here'' and he believed New Zealand owner-operated dairy farms were ''just as efficient'' as larger producers would be.

''There's no notable economies of scale to be gained in New Zealand,'' Dr McCall said.

While the sector had a ''good future'', farmers needed to maintain a comfortable level of debt to cope with the volatility of the market, he said.

Increased production in the US could lead to a price correction, he said.

''We don't really notice it [increased costs] in the better years. When the volatility has a downturn, that's when it shows up,'' Dr McCall said.