NZ remains lowest-cost milk producer - report
The cost of producing milk in New Zealand continues to compare favourably with other exporting regions despite a lift in production costs over the past five years.
The report ‘Survive or Thrive – the Future of New Zealand Dairy 2017-2022’ says processors will struggle to fill existing and planned capacity in coming years as milk supply growth slows.
Three new plants are in the pipeline: Fonterra spending $150m on two new cream cheese plants at Darfield, Open Country Dairy building a new Greenfield pant at Horotiu, Waikato, and Mataura Valley Dairy building a new $240m plant in Gore.
Farmers in Waikato, Southland and Canterbury are the most likely to benefit from increased competition as a result of the new plants.
However, Rabobank says capacity construction has run ahead of recent milk supply growth and appears to factor in stronger milk supply growth than the bank anticipates.
Rabobank dairy analyst Emma Higgins says milk supply has stumbled during the past couple of production seasons and, while the 2017-18 season is likely to bring a spike in milk production of 2-3%, it expects the brakes to be applied and milk production growth to slow to or below 2% for the following four years.
This slow-down in production will have implications for the supply chain, Higgins says.
“There is a risk for processors that they may not achieve optimal capacity utilisation going forward, as milk supply slows. It will be a more challenging and competitive environment to get the necessary throughput for those plants,” she says.
“We have seen extra capacity come online over the past five years, largely to deal with the wave of milk NZ has produced. If we see a slow-down in milk production growth, the risk is that processing plants could be operating at sub-optimal capacity utilisation.”
The second implication is that processors will need to review their strategies for obtaining new or maintaining their existing milk supply.
There are at least three options for processors to maintain their milk base: protecting and defending the status quo milk supply, aggressively recruiting new suppliers or expanding into new territory, or acquiring existing production assets with milk supply attached.
“Regardless of the supply strategy employed, processors will need to deliver more competitive returns to farmers to ensure supply ‘stickiness’, either by adding value to their product mix where possible and passing some gains to farmers, or efficiently producing commodities at low cost,” Higgins says.
But both of these strategies come with risk.
“Value-add is easier said than done and requires exceptional execution. Not only does it require additional capital outlay, but it also requires long-term dedication from the suppliers and the company to see returns come to fruition. Producing commodities at low cost is a possible strategy, but a tight rein on cost control is required and there is no guarantee of relief from global market volatility,” she says.
Higgins says the increased competition for milk is most likely to impact on Fonterra, Open Country Dairy and Westland, these being the processors most exposed to adverse shifts in their existing supply base in relation to their current plant capacity.
Key messages in the report
* A slow-down in milk production growth will have implications for the supply chain
* Capacity construction has run ahead of milk supply growth and appears to factor in stronger milk supply growth than anticipated, leading to more cautious investment in capacity over the next five years
*Companies and co-ops will need to review their strategies for obtaining and maintaining their milk base
* Farmers will likely benefit as increased competition for milk brings sharper pricing and a wider range of contractual options.
