Milk production growth expected to slow over decade

Milk production is forecast to fall in next decade. Photo by Jane Dawber.
Milk production is forecast to fall in next decade. Photo by Jane Dawber.
The outlook for the growth of New Zealand milk production over the next decade has been described as going from a "torrent to a relative trickle".

While forecast growth of 30% over the next 10 years was considered rapid by most industry measures, it would be "pedestrian" by recent New Zealand standards, a report by Rabobank senior analyst Hayley Moynihan said.

The dairy industry had ridden a wave of growth. Milk production had increased by almost 50% over the past decade, but constraints were expected to slow the rate of future growth.

Over the next decade, growth would no longer be driven by increasing the number of dairy cows in the national herd, but by productivity improvements as farmers strove to extract greater production per cow, Ms Moynihan said.

With dairy operations becoming increasingly intensive, feed and interest costs had become embedded in production systems.

While production was largely based on an extensive pasture-based system, farmers had increased output through growing more feed or by buying in supplementary feed and that had structurally increased their cost base.

Fertiliser, feed, wages and interest costs now comprised almost 70% of net dairy cash income, up from 40% in 1999-2000. Those increased costs had reduced dairy producers' ability to weather a downturn in the market, she said.

The tightening of environmental regulations was also seen as a constraint to future growth. Consent was increasingly required required around nutrient use, effluent treatment and disposal, management of waterways, stock wintering policies and water usage.

The industry was also expected to mature in other ways, as economies of scale through the amalgamation of smaller farms continued to occur, as well as the "corporatisation" of dairy farms, Ms Moynihan said.

The decline in production growth would also present challenges for those further up the supply chain.

Processors and exporters would face a milk pool that was nearing its limits as well as the loss of cheap raw material and there would also be ramifications across the global dairy market.

The timing of the slowdown in New Zealand's milk volume growth might well prove complementary to global market dynamics, as additional production was expected from the EU as their quotas were removed in the latter part of the decade, she said.

Earlier this week, Fonterra sliced 30c from its previous forecast range for the 2012-13 season to $5.65-$5.75.

In the latest ASB commodities weekly, Prof William Bailey, of the department of agriculture at Western Illinois University said the downward revision was based on the strong New Zealand dollar, rather than weakening demand for dairy products.

All reports from the southern hemisphere indicated the new production season was off to a good start, which would take some of the bullish pressure off prices.



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