MAF report projects continued growth in dairying

18 December 2002

Dairy production and herd size are expected to continue increasing according to MAF forecasts set out in the latest Situation Outlook for New Zealand Agriculture and Forestry (SONZAF) December report.

The report says manufacturing milksolids production was up around six percent for the year ending May 2002, mainly due to rising cow numbers - a trend that's likely to continue. The report does say, however, that annual growth is likely to tail off, mainly as a result of lower expected payouts.

The industry average payout in the year ended May 2002 was $5.32/kg of milksolids (MS), primarily the result of a more favourable US dollar/NZ dollar exchange rate. The author of the dairy outlook report, Senior Policy Analyst Tony Wharton, says the medium term outlook is for lower, but increasing, payouts as international product prices recover. "Payouts, however, will be constrained by the assumption of an appreciating New Zealand dollar," he says.

The SONZAF report looks at three time periods - the 2001/02 season, the outlook through to 2005/06 and a scenario for a longer-term outlook.

Highlights for the 2001/02 season include:

  • Opening milking cow numbers for the season were estimated at 3.75 million - an increase of five percent (192,000 cows) from the previous season. An estimated 43 percent of the increase in cow numbers was in the North Island (coming from a small number of dairy farm conversions) - the remainder came from 195 farms in the South Island that converted to dairying in the previous year.
  • Spot-market prices for the main dairy products - skim milk powder (SMP), wholemilk powder (WMP), butter, cheese and casein - peaked at relative highs at the start of the season. By the end of the season, however, prices had fallen by 39 percent for SMP, 36 percent for WMP, 29 percent for butter and casein and 25 percent for cheese.
  • The 2001/02 season was the first for the deregulated dairy industry and of operations for Fonterra.
  • New Zealand's total milk production for the season to 31 May 2002 (including milk for the domestic liquid milk market and milk used on farms) was estimated at 13.9 million tonnes - a record volume for the industry. Most of the increased production resulted from the increased cow numbers.
  • Approximately 1.54 million tonnes of product was exported in the year to May 2002 - up five percent from the previous year.
  • The industry average dairy company payout for the season was $5.32/kg of milksolids - a six percent increase over the previous season. This was due primarily to the more favourable US dollar to NZ dollar exchange rate.

Looking at the period from 2002/03 through to 2005/06, the report says that climatic factors (a cold and wet spring this current year) will likely see per-cow milksolids production for this first season down by approximately one percent.

But Mr Wharton says because the number of cows is estimated to have increased by around 95,000 head from last season, total milksolids production for 2002/03 is predicted to be two percent higher than last season.

Over the medium term, total opening cow numbers are expected to continue to increase to around 3.99 million by June 2005 - a six percent increase from June 2001.

Mr Wharton says, however, that the rate of annual increase in cow numbers is expected to decrease over this period - primarily due to lower expected farmgate payouts than those received in the past two seasons.

"While it had previously been thought that the higher entry costs to dairying under Fonterra would also be a major factor lowering herd expansion and the growth of the milk supply, MAF's 2002 Dairy Farm Monitoring report showed that this was not necessarily the case," Mr Wharton explains.

Other trends identified for the period through to 2005/06 include:

  • Growth in milk production is expected to follow the same general trend as growth in cow numbers.
  • The total volume in dairy products manufactured in the current 2002/03 season will be approximately three percent higher than that of the last season.
  • Over the medium term, increasing milk volumes will result in higher volumes of manufactured dairy products produced and exported. Export volumes are estimated to rise to 1.92 million tonnes in the year to May 2006.
  • International spot market prices are projected to continue a recovery over the medium term. This results from generally higher world growth rates expected from 2003 onwards and an expected increase in demand for dairy products in Asian and non-OECD countries as incomes rise.
  • MAF is forecasting an industry average payout of $3.69/kgMS for the 2002/03 season - 31 percent lower than the 2001/02 season's payout. But from 2003/04 onwards, payouts are forecast to improve in line with recovering world prices, although an appreciating NZD relative to the USD is expected to constrain the increases. An industry average payout of $5.00/kgMS is predicted for the 2005/06 season.

One possible scenario for a longer term outlook is that the nature of dairy markets, especially in developed nations, will continue to change away from supply-led trade in traditional dairy commodities to demand-driven trade in higher value-added products and milk components.

A successful conclusion to the Doha round of trade negotiations with the substantial reduction of export subsidy limits would bring some relief to the international trading environment for dairy products, currently characterised by very high tariffs in many markets.

Tony Wharton predicts new products and new uses for milk will continue to be developed, as will enhancements to existing dairy products to remove or mitigate some of the attributes some consumers find undesirable e.g. fat and lactose.

"As a result, dairy products will be in a position to recapture part of the market that has been taken over by substitute products such as soy milk," Mr Wharton says.

The report also predicts a long-term scenario for New Zealand dairying where the farming of herds of cows genetically selected for their ability to produce particular milk components may well become commonplace in order to meet the demands of particular overseas niche markets at the lowest cost.

It also predicts that the robotic milking of cows could become widespread as the industry works to contain costs and overcome the problems of a shortage of skilled labour entering the business.

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