NZ Dairy Industry
Internationally, New Zealand is the powerhouse of the world dairy industry. It is home to Fonterra, one of the world's largest dairy cooperatives - a cooperative which is also one of the world's leading innovators of dairy products.
New Zealand is currently the ninth largest milk producer in the world, processing in excess of 19 billion litres of raw milk a year. Over the 30 years to 2011-12, New Zealand milk production grew at a CAGR of 3.8% p.a. During that period:
- the area in dairying increased by 64% from 1 million ha to 1.64 million ha
- the number of cows increased by 130% from 2.0 million cows to 4.6 million
- the total number of herds dropped by 2% from 15,821 herds to 11,798 herds
- average farm size increased by 120% from 63 ha to 139 ha
- average herd size increased by 202% from 130 cows to 393 cows
- stocking rates increased by 37% from 2.07 cows/ha to 2.83 cows/ha
- production/cow increased by 45% from 251 kgms/cow to 364 kgms/cow
- production per hectare increased by 88% from 545 kgms/ha to 1,028 kgms/ha
The expansion, consolidation and productivity of the New Zealand dairy industry has been driven by a combination of economic necessity and opportunity. New Zealand farms operate without subsidies and 95% of the milk produced by the New Zealand dairy industry is exported at prevailing world prices. In real terms, milk commodity export prices fell in the 20 years to 2000 and industry consolidation, expansion and productivity gains were needed to reduce production costs and increase revenue in order for farm businesses to remain viable. Since then, milk commodity prices have been rising, farm expansion and consolidation has continued and productivity has continued to improve, capitalising on improved profitability levels.Milk commodity prices 1999 - 2014
Although the majority of New Zealand dairy cows are based in the North Island (63%), along with 76% of the total herds, most of the growth in dairying has been in the South Island where farms, herd sizes, stocking rates and production levels are higher. The average South Island production of 228,000 kgms/farm is about double the North Island average.Regional distribution of dairy cows in 2012-13
Looking forward, New Zealand’s milk production is expected to continue growing but at a slightly slower rate. FAPRI estimate that between 2009 and 2019, New Zealand milk production will grow at a compound rate of 2.3% p.a., slightly above its forecast global rate of 2.1% p.a., while the New Zealand Ministry of Agriculture and Forestry (“MAF”) forecasts that milk production will increase at a compound annual growth rate of 3.6% p.a. between 2013 and 2017.
Milk Processing and Marketing
At the processor level, New Zealand dairy industry consolidation culminated in 2001 with the formation of Fonterra, a farmer-owned co-operative. Fonterra processes around 90% of all milk processed in New Zealand. The balance of New Zealand’s milk is processed by six other processors, four of whom have commenced business since the demise of the New Zealand Dairy Board, a single desk seller producer board, and the subsequent formation of Fonterra.
The formation of Fonterra was a significant step in the manufacturing and marketing of New Zealand milk. It resulted in the formation of one major processing and marketing co-operative and provided the opportunity for other firms to enter the industry and develop and exploit market opportunities.
Fonterra is responsible for about 35% of the world’s cross border dairy trade and last year it was the largest milk processor in the world. Fonterra sells products to customers and consumers in 140 countries and sources milk from farms in New Zealand, Australia, US, Chile, Sri Lanka, China, and, via the Dairy Partners of America joint venture with Nestle, Brazil, Argentina, Colombia, Ecuador and Venezuela. It collects more than 15 billion litres of milk a year and manufactures and markets over 1.8 million tonnes of product annually. It has around 16,500 staff in 40 countries, 6,500 of whom are based outside New Zealand.
When it was formed, Fonterra was owned by 11,000 dairy farmers who supplied 95% of the country’s milk. It is currently owned by 10,485 dairy farmers who supply approximately 90% of the country’s milk.
To supply milk to Fonterra, suppliers have to meet its co-operative share ownership standard, of one Fair Value Share for each kgms supplied. Fonterra shares are currently available via the Fonterra shareholders fund. The current price of a Fonterra share can be seen on www.nzx.com/companies/FSF.
In 2012, Fonterra introduced a scheme known as “Trading Among Farmers”. This scheme, which removes redemption risk and gives Fonterra improved access to equity capital, also enables suppliers to trade shares between themselves within prescribed share ownership limits. Members of the public are also able to invest in a Fonterra derivative fund that effectively enables them to own and trade Fonterra Shares on a beneficial, non voting basis.
Milk Products and Markets
Only 7% of the world’s milk production is exported from the country of origin. Export returns from selling manufactured milk products are generally lower than returns from selling fresh milk locally. Lower returns, coupled with the higher cost of feed on the Confinement Dairy Farms that dominate world milk production, mean that prior to the current high milk prices it was uneconomic to export milk products from most countries, unless there were subsidies.
New Zealand is a notable exception to this prevailing situation. New Zealand only produces around 2% of the world’s milk but exports around 95% of the milk it produces and accounts for more than a quarter of internationally traded dairy products.
New Zealand is a significant supplier to a number of key dairy markets including China, and South East Asian and Middle Eastern countries where the demand for western-style dairy foods is increasing rapidly.
New Zealand dairy products are marketed to 151 countries around the world. New Zealand dominates trade in whole and skim milk powders and butter. It also has a significant share of international trade in cheese.
New Zealand’s most important markets are Europe for butter, the US for casein, Japan for cheese, and Asia for whole milk and skim milk powder.
Whole milk powder (“WMP”) is the largest single export product category by volume, value and growth rate, and New Zealand is the leading supplier of WMP to the global marketplace. In the five years to 2011, the value of New Zealand WMP exports more than doubled to $5 billion, with most of this growth coming from China. WMP now accounts for more than 40% of all New Zealand dairy exports, and China is now the single biggest export market for both WMP and dairy products as a whole. More than two thirds of New Zealand’s WMP exports are to Asia and the Middle East.
Pastoral Dairy Farming in NZ
New Zealand operates a low feed cost dairy farming system based on intensive grazing of pasture. The ability to feed low cost pasture is key to profitability.
Based on DairyNZ cost estimates, New Zealand pastoral dairy farmers will spend an average of 17 - 20 cents/kg dry matter on feed in the current farming season. Feed costs include supplementary feed, stock grazing, fertilizer, irrigation, re-grassing, weed & pest protection and run-off costs, but exclude the costs of the land used for feed production.
In contrast, the total ration feed cost on US Confinement Dairy Farms (at an exchange rate of 85 cents) is around 30 cents/kg dry matter.
It is generally considered uneconomic to produce milk in the US and elsewhere using confinement systems, when the prevailing milk-to-feed price ratio is below a multiple of 3.0 times (view the current US milk-to-feed ratio here). As a result, many dairy farmers globally can only profitably supply higher value fresh milk to closed or partially closed domestic markets where local milk prices are above international market prices, often as a result of subsidy structures.
By contrast, New Zealand dairy farmers, with their more favourable milk-to-feed price ratio, are able to profitably supply the deep international export marketplace at the prevailing world price, without subsidy. The structural comparative advantage of pasture versus confinement feed-based dairying should be further exacerbated by anticipated long term price growth in animal feeds such as corn and wheat.
The price of purchased feeds such as corn and wheat are not related at all to milk prices. This can result in teh very difficult situation of low milk prices and high feed costs whcih can result in larges losses being incurred. In contrast, the indirect nature of feed costs on pastoral dairy farms means they are much more stable and less influenced by short term fluctuations in milk price.
Principles and Practices of Intensive Pastoral Dairy Farming
Pasture-based dairy farming is based on maximising the production and utilisation of pasture by grazing animals i.e. growing as much grass as possible and then turning that grass into milk as efficiently as possible. Unlike Confinement Dairy Farming systems, which typically have much higher levels of per cow production, intensive pasture-based dairy farming aims to produce high levels of milk solids per hectare as cost effectively as possible.
Pastoral dairy farmers aim to maximise pasture production through high genetic worth pasture species, applying fertiliser to ensure that nutrients are not limited, making sure that weeds and pests are properly controlled, improving soil drainage where necessary, making strategic use of irrigation where available and appropriate, and making use of controlled grazing systems in which pasture is grazed and then spelled to allow it to regrow.
Controlled grazing systems also enhance pasture utilisation and ensure that animals can be fed to their requirements which vary according to their age and stage of lactation. Farmers also aim to maximise pasture utilisation by aligning feed demand with pasture production through the adoption of a seasonal calving pattern and the use of hay and silage and other supplements and off-farm grazing to reconcile any periods of feed surplus and deficit. They also ensure they have an appropriate stocking rate and use high genetic merit cows that have been bred specifically to efficiently convert pasture into milk with a high milk solids content (in New Zealand, milk is paid for on the basis of its milk solids content).
Cows on New Zealand pasture-based dairy farms typically calve in a concentrated pattern onto the spring flush of pasture production and are progressively dried off during the summer and autumn depending on the availability of pasture. They remain dry during the winter months when pasture production is slow and calve again the following spring. Surplus spring and early summer pasture is made into silage and hay, which is fed back out to cows during the autumn and winter and other periods when there is a feed deficit.
Research and Development
New Zealand dairy farmers and the pastoral production systems they use are widely recognised as world leading. In large part, this position is a consequence of the co-operative way in which the New Zealand dairy industry has developed and continues to operate.
Of particular note is the research and extension work that is undertaken by DairyNZ, the New Zealand dairy industry good body funded by Government research grants and a levy on the milk farmers supply to processors, currently 3.6 cents/kgms. DairyNZ’s objective is to secure and enhance the profitability, sustainability and competitiveness of New Zealand dairy farming. It aims to achieve this by leading innovation in world-class dairy farming and by working in the best interests of New Zealand's dairy farmers.
DairyNZ was created in November 2007 through the merger of its predecessors Dairy InSight and Dexcel. Its focus is on three key investment areas: productivity (feed, animals and farm systems); sustainability (environmental management, biosecurity, animal welfare and community impact); and people and business (farm business and human capability).
DairyNZ’s work includes research and development to create practical on-farm tools, leading on-farm adoption of best practice farming, promoting careers in dairying and advocating for policy, legislative and investment decisions by central and regional government which are good for dairy farming.