Strategy

NZ Inc: Why we need to diversify from our dairy dependence

cow

In 2010 the number of cows surpassed the number of humans in New Zealand. We can’t ignore the impact dairy has had on our country. It now represents over a third of our export receipts. So the question is are we now depending on it too much? And if so at what cost? Striking the careful balance between economy and environment will continue to be challenging and complex for NZ Inc because it’s been a major factor in the way we have come through the GFC.

The latest 2012-13 Dairy NZ Economic Survey outlines how far we’ve come. We’re now close to a stocking rate of 3.2 cows per Ha nationwide from 1 cow/Ha only 15 years ago. Conversions from sheep & beef to dairy continue and might only accelerate with the potential of more irrigation schemes coming online in the future.

Technology will play a role in mitigating the environmental impacts of intensified dairying with smart devices that already help monitor and measure effluent, nitrogen, phosphorous applications. Same for cow barns if Dairy NZ, farmers and banks can get assurity on the capital expenditure. However this will only get us so far.

Another factor is the latest emergence of artificial or synthetic milk. However we suggest this could be another margarine vs. butter. I prefer natural to artificial.

The other threat to our dependence on dairy is cheaper overseas competition. New Zealand increasing adoption of supplementary feed (like Palm Kernel) means that we are losing the low-cost production and pastoral advantage we had as farmers and NZ Inc asks for greater production and intensification. Chile and other countries are learning our pastoral systems and have the greater land mass to take advantage of a growing Asian appetite for dairy. US producers are investing in whole milk powder driers. Both these countries and others won’t be ignoring the opportunity.

Then there’s the other ‘d’ word: debt. Managing dairy’s growing debt which now sits at over $26 per Milk Solid against a payout that has dropped, without much warning by a dollar to $6 for the new season (down from $8.65 as at time of going to press). Servicing that debt is reliant on land prices staying at the levels they are or increasing rather than detracting. The latest Reserve Bank’s report on Dairy from May tells us dairy debt stands at $32b and half of that debt is held by 10% of dairy farms meaning those operators will be highly exposed if there is a drop in payout or land prices.

Like any good fund manager will tell you diversification is key. You don’t put all your investments in the one basket. You spread the risk. China is, and will continue to be, a significant trading partner for New Zealand (the last 4 years particularly as as the graph below demonstrates). New Zealand currently supplies over 70% of China’s dairy imports in 2013 yet recent food scares and changes in compliance certification have shown how quickly those borders can close.

 

China exports

 

But what about other countries like Africa and India? The graph below shows how important these two developing countries could be to help with NZ Inc’s drive to diversify (the World Bank predicts China and India will become the world’s first and third largest economies):

 

Global dairy demand projection

 

As everyone’s good mate Albert Einstein said: “We can not solve our problems with the same level of thinking that created them.”

One of those thoughts might just be how NZ Inc can start to generate more value rather than volume to be more sustainable.

Time we got thinking.

One Response to “NZ Inc: Why we need to diversify from our dairy dependence”

  1. Very good post on dairy business.. very good informatons and facts have been shared by you..

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