The Free Trade Agreement with China in 2008 has been an unequivocal success for the New Zealand dairy industry. Photo / 123RF
A decade and a half after signing a Free Trade Agreement with China, New Zealand looks set to strengthen its commanding position in the giant economy.
Since the far-reaching agreement was signed in 2008, it has been an unequivocal success for the New Zealand dairy industry.
All up, dairy exports to the world generated nearly $26 billion in revenue in 2023 – or one in every four export dollars earned.
In total, the value of dairy exports has grown by 45 per cent over the past five years, with much of that growth driven by China.
Since 2008, milk powder exports to China have been tariff-free up to a so-called “safeguard” volume, which has been progressively increasing.
When tonnage has gone over the safeguard level, a 10 per cent tariff has applied. But from this year, that safeguard lifts permanently and the tariff becomes zero.
Back in 2007, New Zealand exported just $390.9 million worth of dairy products to China. By 2010 that figure had hit $1.83b. In 2016, dairy exports to China were worth $2.4b before peaking at $7.33b in 2021.
While it’s mostly been an upward trajectory, exports sank back to $6.5b last year, partly due to the Covid-19 effect and higher dairy production inside China.
Going tariff-free will not bring about a huge lift in demand, but it will consolidate New Zealand’s position as China’s supplier of choice for imported milk powders, said Stu Davison, a Kiwi dairy consultant to Chicago-based commodities house HighGround Dairy.
“It puts New Zealand milk powders at an advantage over everyone else exporting to China,” he said.
Safeguards in the Free Trade Agreement (FTA) allow China to impose a lower duty for imported products below the predefined volume, and apply a higher tariff for import volumes that exceed a defined trigger level.
The agreement included four different baskets of safeguards covering liquid milk and cream, butter and fats, cheese, milk powders and concentrated milk.
The safeguards for three of the four baskets (liquid milk, butter and cheese) were removed in 2022, as agreed in the FTA.
For Fonterra, this country’s single biggest exporter, the removal of the final safeguard gives New Zealand duty-free access to the world’s largest dairy import market.
And when it comes to China’s dairy imports, New Zealand is already the biggest kid on the block.
“Milk powder is not really a problem for us,” Davison said. “We have had the dominant market share, basically, forever.”
New Zealand provides between 75 and 97 per cent of China’s whole milk powder imports.
But while New Zealand’s dairy exports to China have risen dramatically over the years, so too has China’s dairy industry, thanks in no small part to Kiwi expertise and the controversial exporting of live New Zealand dairy cows to the People’s Republic.
In just a few years, China has become the world’s fourth-largest dairy producer and is on the way towards taking the No 3 slot.
“The last two years have shown that, if there is enough milk being produced in China, they don’t come to the whole milk powder market as strongly, and that means we have to find markets for it elsewhere,” Davison said.
Skim milk powder makes up a third of China’s dairy imports.
The FTA gives China more incentive to come to New Zealand for a greater portion of its skim milk powder needs.
“Obviously, they have got that 10 per cent advantage and they like the quality of New Zealand skim milk too, so it’s a two-pronged approach.
“We have seen growth in skim over the last five years, but there is not a lot of argument that says that skim can grow at the same rate going forward.
“We will see New Zealand skim take up a larger proportion of China’s skim milk powder imports as product from Europe and the US will end up in other markets, so there will be displacement under the current outlook.
“We really can’t get a whole lot more market share for whole milk powder.”
Beyond powder, the other products driving growth are cheese, butter, ultra-heat-treated (UHT) milk and UHT cream.
“There is an expectation that the FTA might help again on those fronts,” Davison said. “But again, it’s not likely that it will create a boom of demand.”
The FTA had been “paramount” for growth in the New Zealand dairy industry.
“China just grew so much and the consumption of dairy has done New Zealand very well.
“The argument is that we have also traded a lot of technology and cows into China as well, which has allowed them to build their internal dairy production system substantially.
“They are growing their milk supply very quickly.”
While the FTA had served New Zealand well, he said “the question is, can that growth continue to outpace China’s own system and keep us in the game?
“The theme of the last 18 months has been that their production has grown so much while their consumption took a hit.
“China’s economy needs to keep growing to grow the middle class and for the middle class to grow dairy consumption.
“We have grown output so much, and China has soaked up so much of it, it has actually grown New Zealand’s economy substantially.
“There should not be any regrets.”
In general, New Zealand’s goods exports to China have quadrupled since 2008 and the nation is now New Zealand’s biggest trading partner.
The removal of tariffs gives New Zealand dairy products a competitive advantage over products from Europe, said Fonterra chief executive Miles Hurrell.
“However, while removal of the tariffs means a 10 per cent reduction in the cost of procurement, tariff reductions tend to be spread across the supply chain, benefiting customers, consumers, exporters and suppliers.”
Hurrell said 16 of Fonterra’s largest ingredients resellers in China visited New Zealand recently.
“Collectively, our authorised resellers in China account for about one-third of ingredients purchasing volumes on the Global Dairy Trade platform, underpinning prices for reference products.”
The feedback from the resellers was that they remained watchful, given the recent uncertainty in the Chinese dairy ingredients market, Hurrell said.
Nathan Penny, former senior agricultural economist at Westpac who is now an agriculture adviser to the Queensland Government, said the benefits of the FTA should not be under-estimated.
“It is, I believe, the story of the last generation. I would not underplay it.”
While some commentators have said New Zealand has become too reliant on China, he said there were still opportunities there.
“Yes, Southeast Asia is growing fast, and there is plenty of opportunity there, and yes, India will increasingly be an opportunity over the next 10 to 20 years.
“But at the same time, China is still growing and there is still that 300 million-strong middle class and there is still scope for that middle class to grow.
“The FTA has been a catalyst and, as we look back, we will see it as a game-changer for our export industry.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
Dairy export revenue has lifted 16% to a record $27 billion.