$1b gain forecast for dairy industry

MAF predicts an increase in the dairy herd, but little rise in the sale of value-added products. Picture / Wairarapa Times-Age

The dairy industry could put an extra $1 billion into the economy by 2010, the Ministry of Agriculture and Forestry predicts in its projections on milk production and payout.

MAF's figures assume the present export mix of commodity and value-added consumer products will continue.

But Dairy Farmers of New Zealand vice-chairman Lachlan McKenzie said the gains could be even higher if Fonterra sold more branded consumer products, rather than commodities.

MAF predicts production will rise to 1.358 billion kilograms of milk solids by 2010.

The payout to farmers would rise to $4.56/kg of milk solids, although that would be 3c/kg below the payout for the 2004-05 season.

If the forecasts are accurate, it would make for a total payout of just under $6.2 billion.

Production for this season is forecast to be 1.265 billion kg, and the payout $4.10/kg, giving a total payout of just under $5.2 billion.

MAF expects the payout to dip to $5 billion in 2008, then rise again to $5.7 billion in 2009.

The figures are for the entire New Zealand dairy industry.

Last season, Fonterra's production was a record 1.21 billion kg, which made farmers $5 billion at $4.10/kg.

In the 2004-05 season, Fonterra's production was 1.16 billion kg, worth $5.3 billion at $4.59/kg.

If the number of dairy suppliers remains stable at MAF's estimate of about 12,000, the increase in average gross payout between 2007 and 2010 would be more than $80,000 for each supplier.

MAF's monitoring and evaluation manager, Peter Gardiner, said dairy product prices were expected to fall in the next few years as supply increased.

"The near-term outlook is very much one driven by increased supply which is depressing the world market prices."

But world supply was expected to stabilise after a few years, and the lower dollar would help increase returns to dairy farmers.

Fonterra - responsible for the bulk of the dairy trade - declined to comment on MAF's figures.

But McKenzie hoped the payout figures could be pushed higher than MAF's projections by an increased focus on sales of value-added products, rather than commodities.

He was disappointed the projections appeared to assume static earnings from value-added milk products.

He thought something like 70 per cent of earnings coming from value-added would be closer to an ideal figure.

But one industry observer said achieving such an enormous shift in the make-up of dairy exports would be a huge task.

Fonterra's value-added consumer brands business accounted for about 28 per cent of its revenue last season, and Waikato dairy company Tatua has estimated about a third of its business was value-added.

Fonterra CEO Andrew Ferrier said last month the co-op had ambitious targets for increasing the performance of its value-added business.

Dairy payout

* 2007 estimated $5.2 billion.

* 2010 estimated $6.2 billion.

* $1 b increase would equate to a rise in average payout of more than $80,000 a supplier. MAF forecasts assume higher production and better payouts per kilogram of milk solids.