Dairy products are vital to New Zealand’s economy. They make up over a quarter of our exports and are a key economic driver. Over the last decade we have seen fundamental changes in global food markets with a significant underlying lift in demand, and in particular with dairy as a commodity. However this shift is not without a shift in volatility as well.
Factors that have influenced these changes include:
• Global economic uncertainty following the 2008 credit crisis and the current European debt crisis
• The use of bio fuels in developed countries
• Changes in diet for the middle class populations of Asia
• Structural changes in trade and agricultural production
• Extreme global weather conditions
Historically dairy has been less at risk of market volatility than other commodities. However, partially due to the current European debt crisis and expanding global milk production; New Zealand’s dairy sector has also been facing volatile international prices. While there has been some small growth in dairy commodity prices in recent times, it is hard to predict a trend in the very short term. However, future prospects remain bright.
The good news is that there is a positive outlook for the dairy industry in the long term. As demand for food has increased with the world’s rapidly growing population, food prices have continued to increase. Furthermore, with the growing affluence in some developing countries, millions have switched to animal-based products as a good source of protein and healthy nutrition. Consequently, there is abundant opportunity being created by the growing international demand for dairy products.
A good example is Asia, which has seen the largest growth in international demand for dairy. This growth is due to a number of factors including population growth, a rapidly expanding middleclass and dietary changes to include western-style foods. For example China has emerged as a strong market for dairy exports.
Also supporting this increased demand is the positive economic outlook for South East Asia, OPEC members and Russia; who are dominant importers of butter and milk powder. Fortunately New Zealand, accounting for more than a third of the traded market, has a good trading relationship in these key markets.
New Zealand’s dairy industry will also be supported by the new free trade agreements with China, Hong Kong and Malaysia. Free trade agreements are also under negotiation with Korea (which currently has an 89 per cent tariff on butter).
There is also international interest in investing in New Zealand agriculture due to the increasing concern for food security. Governments in food constrained regions such as the Middle East and China are seeking agricultural investments in countries that have food surpluses and this is likely to continue.
Another advantage New Zealand’s dairy industry has over other countries is the temperate climate, rich fertile soil, and abundant and reliable water supply. In fact New Zealand is third in the OECD on the measure of agricultural land per person. While Australia has the most agricultural land per capita, much of that land has very low productivity. The other leading countries, Iceland and Canada, have shorter productive seasons because of their exposure to cold winters. Combine the quality of our agriculture with the advanced technology employed here, and you currently have a large surplus of dairy for export.
New Zealand should be able to meet the increasing demand in these emerging markets with more product varieties. While the trade in whole milk powder is looking strong e.g. one of New Zealand’s largest dairy co-operatives is constructing what will be the world’s largest 30 tonne an hour dryer, the New Zealand dairy industry will continue to look at value added products as a means of going forward. Supplying nutritional milk products to a wider range of high value export markets, will help safeguard companies against the volatility of the bulk dairy commodities market.
In conclusion, despite the turmoil of international markets, the long-term prospects for dairying in New Zealand remain very positive. With the demand for dairy products growing, dairy export revenues are expected to increase. This is largely thanks to the aforementioned strong economic growth in emerging market economies and New Zealand’s position in those markets.