Long term fears over New Zealand dairy costs

By Neil Merrett

- Last updated on GMT

Related tags New zealand Milk Dairy

New Zealand farmers continue to step up milk production following a
bumper year for their exports, though the country's long-term
status as a low cost dairy producer could be under threat,
according to the US Department of Agriculture (USDA).

As one the world's key exporters of dairy products, any significant changes to milk production in New Zealand could have significant implications to the global supply chain. In the 2006 to 2007 marketing year, the country's exports reached record levels for both volume and price, with co-operative group Fonterra, which accounts for 95 per cent of the market paying 43.5 per cent more to its farmers for their milk over last year. The increase amounted to a rate of US$5.12 (€3.47) per kg of milk solids. Milk production is already being stepped up in the country on the back of these record prices, though there are concerns in the longer term over maintaining cost effectiveness in the market. With processors already facing increasing prices for their milk supplies, the news could lead to further cost hikes within the global supply chain for dairy ingredients like milk powders. New Zealand milk output will continue to increase marginally next year by about 1.5 per cent, on the back of growing demand for the commodity. The most significant increases though will not occur until the following season with increases expected of between four to six per cent, according to the USDA. An additional time period to adjust to higher prices in the country, and a growing number of dairy farms in the country were attributed to the further production hikes. Though production growth is expected to stabilize at 1.5 per cent to three per cent in the next few years, as the number of farmers converting to dairy production slows down, cost effectiveness is likely to decrease. The USDA says that each increase in payments to farmers often leads them to increase expenditure on their input to increase milk output. "This, combined with significant land price appreciation, has negatively impacted on returns to capital and brings into question the ability ofNew Zealandto continue its status as a low cost dairy producer,"​ the USDA added. The surge in dairy conversions has not been wholly detrimental to the industry though, according to the USDA. Producers in the country are being able to take advantage of Fonterra's research and development abilities to meet growing demands for science funding and extension work.

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