New Zealand countryside turning brown from this year's drought.
Resource constraints threaten the competitive advantages for the world’s top dairy exporter.
Source: U.S Dairy Export Council
Rains that began falling in mid-April in New Zealand brought relief to pasturelands scorched by the nation’s worst drought in decades.
But while the precipitation lifted hopes for a good 2013-2014 season, it failed to wash away the growing body of evidence that suggests that the world’s top dairy exporter will have an increasingly difficult time maintaining its advantage as a low-cost milk producer, as well as its pastoral image.
"The rapid growth of New Zealand’s dairy sector is straining the island nation’s already limited resources," says Brad Gehrke, director, global trade analysis for the U.S. Dairy Export Council.
"New Zealand milk production gains have largely been driven by farm conversions and greater numbers of dairy cows," Gehrke says in the May 13 edition of the USDEC Export Profile. "Moving forward, producers will increasingly need to rely on intensification of production systems—more cows per acre and significantly higher use of supplemental feed. That translates into higher production costs."
As of June 30, 2012, New Zealand housed about 6.5 million head of dairy cattle. In U.S. terms, that equates to taking all the dairy cows in California, Idaho, Michi¬gan, Minnesota, New Mexico, New York, Pennsylvania, Texas and Wisconsin and cramming them into an area about the size of Colorado—and then having enough pastureland to feed them all, plus more than 31 million sheep and 3.7 million beef cattle.
Key Kiwi regions are reporting heightened concerns that the country cannot continue to support recent trends in cow numbers and milk output growth. State governments have been forced to tighten regulations on dairy farm conversions and are considering restric¬tions on water use for irrigation.
"Environmental pressures are bound to increase," says Gehrke. "And for New Zealand, the environmental issue is not only a supply constraint, it is also a demand constraint. New Zealand has historically marketed its dairy industry as environmentally friendly. But it is rapidly becoming abundantly apparent that expanding the country’s dairy sector has come at a significant and adverse cost to the environment."
Multiple recent environmental studies have given New Zealand poor marks in water quality, preservation of natural vegetation and habitat, greenhouse gas emis¬sions and care for endangered species, pointing the finger at the nation’s ag sector, particularly dairy farming.
Preserving the environment and maintaining recent milk output growth rates under a pasture-based production system is an "either/or" proposition, USDEC says. And switching to a more feed-intensive system not only raises costs, it erodes the country’s pastoral image.
The rising frequency of extreme weather events is likely to amplify the problems. This year’s drought drove up production costs while simultaneously undercutting output. Fonterra Co-operative Group went so far as to warn that it might need to ration exports this year.
"New Zealand’s ‘pure’ reputation and perceived deficiencies in competitors’ products or services are major factors that allow it to charge a premium over U.S. products, partially offsetting rising costs for feed, feed infrastructure, energy, labor and other inputs," says Gehrke. "If the country’s own customer service or its environmental or pastoral reputation erodes—or, better yet, if U.S. suppliers continue their trajectory in demonstrating their commitment to global markets by providing the products and services demanded by overseas buyers—those premiums may become more difficult to charge."
The bottom line is that New Zealand’s ability to boost milk output while remaining a low-cost producer is shrinking, and that creates opportunities for U.S. suppliers.