New challenges facing New Zealand's dairy industry will likely force a slowdown in milk production over the next decade, according to a new report.

Agribusiness banking specialist Rabobank said the industry had ridden a wave of steady growth over the past decade, with milk production increasing by almost 50 per cent.

Good returns, increased capital investment, and strong asset growth had fuelled the development of new dairy farms and processing facilities.

But farmers would need to start looking at how to better squeeze productivity gains from their existing herd, as well as finding ways to control their costs, said Rabobank senior analyst and report author Hayley Moynihan.


"Over the next decade, growth will no longer be driven by increasing the number of dairy cows in the national herd, but by productivity improvements as farmers strive to extract greater production per cow.

"The heady days of more than 300 new farm conversions nationally in a single season are over."

More land had been converted into dairy farms in the past decade because the economic returns were better than in other agricultural industries, Moynihan said.

According to Statistics New Zealand, the country now had more than six million dairy cattle.

Dairy cattle numbers increased by 259,000 in the year ended 30 June 2011, with most of the increase in the South Island.

Rabobank said milk production in the South Island had risen from about 15 per cent of national production ten years ago to 36 per cent now.

Easier access to credit, providing farmers with the capital to expand, was another reason behind the boom times, she said.

Those factors underpinning growth would become less relevant and new constraints would start to affect production.


New Zealand dairy operations would become increasingly intensive.

"As a result, fertiliser, feed, wages and interest costs now comprise almost 70 per cent of net dairy cash income, up from 40 per cent in 1999/2000," Moynihan said

The rise in such costs would in turn affect farmers' ability to weather a downturn in the market.

Another constraint would be around the tightening of environmental regulations, with more attention falling on issues like effluent treatment and disposal, and waterway management.

Moynihan said that forecast growth of 30 per cent over the next 10 years was "pedestrian by recent New Zealand standards".

"While a window of opportunity is likely to remain for a while yet in Canterbury on the back of their irrigation developments, future growth is likely to come from increased production per cow."

Those further up the supply chain would feel the effects of lower milk production, as would the global dairy market, she said.

Importers who relied on New Zealand dairy products were likely to consider other countries if we were unable to keep pace with growing demand.

BNZ economist Doug Steel agreed it would be hard to continue such high recent growth rates but said there were still plenty of ways to keep growing productivity.

For example, if farmers "at the bottom" - those producing less milk - were to reach industry standards, that could lift the country's average rate of production per cow.

If productivity were to taper off, it did not necessarily mean tough times for the industry, he said.

Dairy giant Fonterra's strategy had been "getting across borders", sourcing more milk from other parts of the world. That meant the cooperative was not entirely reliant on New Zealand milk production.

Steel also said productivity rates were not everything.

"We probably pay a bit too much attention to the volume we make and maybe we should be paying a but more attention to the price we're receiving, and our margins.

"Often we talk about real GDP but often what grows our economy is much more about the prices than the production rate."

The Rabobank report was not available to link to in this story.