Bank identifies big supply gap in milk production growth

Rabobank predicts slow milk production growth for the next four years will make companies wary about investing in processing expansion.

New Zealand dairy processors will struggle to fill existing and planned capacity in coming years as an anticipated decline in milk supply leads to more cautious investment in capacity, according to a new report from Rabobank.

The report, Survive or Thrive - the Future of New Zealand Dairy 2017-2022, says capital expenditure in new processing assets increased between 2013 and 2015, but capacity construction has run ahead of recent milk supply growth and appears to factor in stronger milk supply growth than is expected by the bank.

Rabobank dairy analyst Emma Higgins says milk supply has stumbled over the past couple of production seasons and, while the 2017/18 season is likely to bring a spike in milk production of 2 to 3 per cent, Rabobank expects the brakes to be applied and milk production growth to slow to, or below, 2 per cent for the next four years.

"Rabobank expects ... milk production growth to slow to, or below, 2 per cent for
the next four years [after 2017-18]."

With the slowdown, companies and co-operatives would need to review strategies for maintaining their milk base and farmers were likely to benefit as increased competition for milk brought sharper pricing and a wider range of contractual options.

Ms Higgins says the increased competition for milk is most likely to impact on Fonterra, Open Country Dairy and Westland, as the most exposed processors to adverse shifts in their existing supply base in relation to their current plant capacity.

She expects farmers in the Waikato, Southland and Canterbury regions to be the most likely to benefit from increased competition, with three new plants in the pipeline over the next two years.

National dairy statistics show in 2015/16 dairy companies processed 20.9 billion litres of milk, down from 21.253 billion litres in 2014/15.

The statistics also show there were 2.3 million dairy cows in New Zealand in the 1985-86 season, with the national herd growing to 4.9 million dairy cows in 2015/16 - 280,435 of them in Northland with 77,572 in 263 herds in the Far North district, 99,656 in 306 Whangarei herds and 103,207 in 338 Kaipara herds.

Meanwhile, Beef + Lamb New Zealand's (B+LNZ) Economic Service said New Zealand's beef cattle herd increased by 2.8 per cent to 3.6 million head during the past year as farmers move toward profitable livestock that are less labour-intensive than dairying.

Northland is grouped with Waikato-Bay of Plenty for the Economic Service's annual stock number survey, which estimates the northern regions have 1,179,000 beef cattle this year, compared with 896,000 on the East Coast and 413,000 in Taranaki-Manawatu - a total of 2,545,000 for the North Island, more than double the 1,089,000 beef animals in the South Island.

Northland-Waikato-BoP total beef cattle decreased 1.6 per cent in the year to June 30, with the decline driven by increases in all classes of cattle except weaners, plus an extremely wet autumn and high store cattle prices leading to farmers not replacing cattle sold with the usual number wintered.

B+LNZ said anecdotal reports from farmers suggested cattle had become too expensive and they expected a reduction in prices.¦