Dr Tim Mackle, chief executive of DairyNZ, warns of the challenges ahead for New Zealand dairying.

The greatest threats to New Zealand's competitiveness as an international dairy exporter are here at home, a major study by DairyNZ, the industry organisation for dairy farmers, shows.

New Zealand is the world's largest exporter of dairy products, and this accounts for 27 per cent of the country's export income.

The study on competitiveness by the DairyNZ economics group shows New Zealand is in a strong position through a combination of cost of production and scale and enjoying a strong share of total world dairy export profits, but it says our position will be difficult to defend.

Most of the threats to competitiveness over the next 10 years are in our own hands.

These relate to cost competitiveness, overcoming constraints to growth, industry fragmentation and protecting our industry's reputation.

International dairy trade is set to grow by 2 per cent per year. This is great for the economy but to maintain our market position we need to increase production by the same rate.

Anything that restricts our ability to grow has the potential to harm our competitiveness, and ultimately the economy.

Our challenge is to continue to grow to maintain this competitiveness, but to do it sustainably.

The size of our environmental footprint can't continue to increase along with the size of the economic contribution we make to New Zealand.

Over-zealous regulation or regulation imposed because of the industry's inability to adopt more nutrient and water-efficient farm systems are two scenarios the industry must work to avoid.

The strategy for New Zealand dairy farming is clear on the need to address issues such as water quality, energy and water use.

We are also investing considerable sums into areas such as molecular genetics - finding genes and markers for traits such as mastitis resistance or feed conversion efficiency.

There's up to $10 million being invested by the industry in a research programme aimed at measuring the effectiveness of nitrification inhibitors in reducing nitrous oxide emissions and nitrate leaching while enhancing pasture growth.

We're also funding research into reducing ruminant methane emissions and researching grazing strategies and stand-off use to minimise nitrogen emissions.

The results will enhance productivity and sustainability. It's not about simply having more cows, it's about having cows which are more efficient.

Losing our cost competitiveness is another major threat. This will happen if we can't make the necessary efficiency gains on farm and/or if big additional compliance costs are imposed by local government.

Another domestic threat is industry fragmentation and diminishing collective spirit within our industry. One of the key factors to our success - despite many challenges - has been the collective spirit shown by farmers and their co-operatives over years.

It is vital with the emergence of new ownership structures of dairy companies and farms, including foreign ownership, that this willingness to work together on the big issues continues.

The final domestic threat is the need for us to ensure environmental and animal welfare practices are of a standard so we don't risk losing our international reputation for the quality and integrity of product.

It is this international reputation which is attracting foreigners to invest in the New Zealand dairy industry.

Internationally, price volatility is a certainty, as dairy farmers have experienced in the last 12 months.

The only way farmers can guard against this is to build resilience into their systems, and ensure their budgeting and financial planning is robust.

The challenges in the opportunities ahead are complex, but I'm confident that while New Zealand is no longer the world's cheapest producer of dairy products, we are in a good position to maintain our international competitiveness if the domestic threats are not realised.