Matthew Newman: Back to basics best road to follow

It's important for New Zealand to maintain its reputation in the world dairy market.

New Zealand has a special place among developed countries because nearly three-quarters of its export earnings are generated from the primary industries of agriculture, horticulture, viticulture, forestry, fishing and mining.

In 2013-14 year dairy alone accounted for a third of the total value of merchandise exports. Therefore the New Zealand economy and wellbeing of New Zealanders relies heavily on the success of dairy, our largest export industry.

Our dairy sector is competing with other dairy exporting nations to supply safe, reliable and quality dairy commodities, ingredients and products to the world. To continue to do this successfully we need to maintain our reputation and ensure we can continue to grow milk production efficiently and sustainably.

China major player

Undoubtedly, the big change in dairy markets in the past decade has been the increase in demand for dairy from Asia, particularly China. Since 2000 Chinese dairy consumption has quadrupled to about 30 million metric tonnes (compared with 0.7 million metric tonnes in New Zealand). However, on a per capita basis, Chinese dairy consumption is about a third of average global consumption so there is plenty of opportunity for further growth.

"There is increasing risk that we have locked ourselves into high-cost systems that are difficult to adjust when milk prices are at low levels."

Chinese domestic production has failed to keep pace with the rise in dairy consumption, increasing the reliance on imports, which account for 17 per cent of global dairy imports, compared with 4 per cent in 2000. New Zealand has benefited greatly from the dairy consumption growth in China, particularly for wholemilk powder, where it has the largest share of Chinese imports. However, other countries have seen the high returns and market share New Zealand enjoys in China and dairy companies throughout the United States and European Union have been expanding production capacity to compete.

New Zealand's increased dependency on China's dairy market comes with greater risks. First, we rely on continued strong demand from this key market to keep global prices at higher levels. Second, it may become increasingly difficult to maintain our market share as global milk supply expands and competition for Chinese imports builds.

US increases exports

The US has increased its dairy production and exports in the past seven years. Annual US milk production has increased by 1.5 per cent, while exports have nearly doubled to about 15 to 16 percent of total production.

While much of the exported product had been destined for close neighbour Mexico, increasing volumes are now being exported to Asia. The US has built a strong export base in Southeast Asia, China, Korea and Japan, primarily in cheese and milkpowder products.

Production costs critical factor

In the commodity business, cost competitiveness is the most critical element to achieve rewarding margins.

This is where New Zealand has excelled and holds an advantage over the US and EU producers, but America's most profitable farms are closing in when capital requirements and operating costs are considered. There are risks of New Zealand farmers acquiring land at too high a cost as well as locking into high farm working expenses to achieve production growth.

The cost of our production has increased in the past decade as we intensified and chased higher profits because of higher milk prices. This can impact negatively on our resilience as an industry. There is increasing risk that we have locked ourselves into high-cost systems that are difficult to adjust when milk prices are at low levels.

New Zealand's challenge is to maintain our on-farm competitive advantages at a relatively low cost and the sector's ability to deal with regulatory pressures such as environmental issues.

As the ability to increase milk production from expanding land area becomes more difficult, the future growth of the industry will depend more on efficient milk production from sustainable and resilient systems.

Greater efficiency will keep us competitive

Despite fluctuating milk prices, New Zealand's dairy industry is in control of its destiny. It can sustainably convert low-cost, high-yielding pasture into nutritious, high-protein dairy products. Beyond the farm gate it can make the most of its product mix with its global reach and scale, along with supply chain efficiencies and full traceability.

For many farmers, remaining competitive and profitable in the medium to long term, may mean seeking options involving less intensification. Upholding productive capacity, while concentrating on cost effectiveness and meeting environmental requirements and other on-farm compliance will be the challenge. Other farmers will need to manage their intensive farm systems in a manner that will remain profitable in volatile commodity markets combined with currency markets. Regardless of production system, it is time to reassess for the long term.

The message is: It is a good time to review your farm business, including risks and opportunities, and determine future goals and how to get there. In the short term it is back to basics. Focus on improving efficiency and managing cashflow and borrowing in a prudent manner.

By doing this you will be contributing to your own business's resilience and to New Zealand's competitive position.