New Zealand's dairy export value is expected to dip by 7 per cent this year.
New Zealand's dairy export value is expected to dip by 7 per cent this year.
A pessimistic economic outlook for China this year is likely to weigh on dairy consumption, says the US Dairy Export Council, which believes key competitor New Zealand won’t be as “aggressive” on price as in 2023.
In its latest market analysis blog, the council said “modest” milk production growth thisyear by New Zealand and its other main export competitor, the EU, was likely to keep the pressure on US export growth, “but the two are unlikely to be as aggressive on price as they were in 2023 to clear excess milk”.
“Even if Chinese demand improves, Mexico’s appetite remains strong and the global economy picks up, the US will still have to compete with well-established competitors - as we did in 2023,” the council said, citing New Zealand and the EU as its two largest export rivals.
New Zealand dairy exports earned close to $26 billion in the year to April 2023, but the Ministry for Primary Industries expects that revenue to fall this year.
The ministry is forecasting a 7 per cent decrease to $24.1b in the year to June, due to a combination of weakening demand resulting in lower global dairy prices, and a likely drop in export volumes due to a decline in milk production. A possible weaker NZ dollar against the US dollar would offer some support to export revenues, the ministry said.
The US council said a 2 per cent rise in New Zealand milk production in November and 1.2 per cent growth by the EU/UK, combined with weakness in China, had increased competition with US exporters in many key markets and products in 2023.
“As such, milk production in both Europe and New Zealand will be a critical variable to US export performance this year.”
However, the growth outlook for both competitors was “relatively modest”.
New Zealand forecast farmgate milk payouts were “the lowest in four years”, with concerns about drought as the country moved into autumn, the council said. This could potentially be a bigger obstacle than reduced margins.
New Zealand’s biggest milk processor and exporter, Fonterra, earlier this month increased its 2023-2024 season forecast farmgate milk price, with the midpoint lifting by 30 cents to $7.80/kg of milk solids, up from $7.50. Its forecast range for the season increased to $7.30-8.30, from $7-8.
New Zealand's biggest business Fonterra recently lifted its farmgate milk price.
The farmer-owned co-operative said the lift in the farmgate price followed five strong Global Dairy Trade (GDT) product auction events. It noted an increase in demand, primarily from the Middle East and Southeast Asia, for commodity products that influenced the farmgate milk price.
The US council update said EU milk prices were in a “more balanced position”, but with late-year weakness in milk production, payouts had started to rise again, “suggesting the cycle could begin again if demand doesn’t materialise to support a price enhancement”.
The council said on top of near-term challenges, policy uncertainty was likely to dampen significant growth potential for New Zealand and the EU by tempering on-farm investment and moderating output in 2024 and beyond.
It expected EU/UK milk production to lift around 0.5 per cent and saw New Zealand “holding steady, with weather as its ever-present variable”.
Less aggressive pricing by New Zealand and the EU could open the door to US export growth - provided global demand and the US milk supply supported expansion, the council said.
On China, the council said the economic outlook was pessimistic, with consumer and investor confidence within China at their lowest levels in years. A deflationary housing market had eroded household wealth and the macroeconomic forecasters were all expecting a marked slowdown in China’s GDP this year.
Now established players in New Zealand's dairy industry, Chinese dairy companies have also vertically expanded their operations in China. Photo / Jason Oxenham
Despite economic contraction in 2022 and stagnation last year, China remained the world’s largest dairy importer, a position the council believed it would hold for the foreseeable future.
With demand growth questionable, the volume of locally produced milk would have a major role in determining dairy import needs, the council said.
The Chinese industry had made significant investments in boosting local milk production. The expansion was mainly due to vertical integration of the major processors, with most local milk going to the fresh milk market. This had reduced demand for imported fluid milk or whole milk powder (New Zealand’s biggest export product).
The council said with lacklustre consumer demand, low milk prices and high input costs, theoretically, milk production in China would be hampered. But with the vertical integration and the Chinese government’s self-sufficiency goals, it was unclear to what extent normal economic fundamentals applied to China.
Further expansion and commercialisation could still be on the way, further depressing imports until dairy consumption in China rebounded, the council said.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.
