Thursday, 24 August 2017 10:55

More stainless steel, less milk

Written by  Sudesh Kissun
The new Mataura dairy plant under construction at Gore. The new Mataura dairy plant under construction at Gore.

New Zealand dairy processors could struggle to get enough milk to operate their plants, according to a new report by Rabobank.

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.

More like this

NZ household food waste falls again

Kiwis are wasting less of their food than they were two years ago, and this has been enough to push New Zealand’s total household food waste bill lower, the 2025 Rabobank KiwiHarvest Food Waste survey has found.

Featured

Australia develops first local mRNA FMD vaccine

Foot and Mouth Disease outbreaks could have a detrimental impact on any country's rural sector, as seen in the United Kingdom's 2000 outbreak that saw the compulsory slaughter of over six million animals.

NZ household food waste falls again

Kiwis are wasting less of their food than they were two years ago, and this has been enough to push New Zealand’s total household food waste bill lower, the 2025 Rabobank KiwiHarvest Food Waste survey has found.

Editorial: No joking matter

OPINION: Sir Lockwood Smith has clearly and succinctly defined what academic freedom is all about, the boundaries around it and the responsibility that goes with this privilege.

National

Machinery & Products

Tech might take time

Agritech Unleashed – a one-day event held recently at Mystery Creek, near Hamilton – focused on technology as an ‘enabler’…

John Deere acquires GUSS Automation

John Deere has announced the full acquisition of GUSS Automation, LLC, a globally recognised leader in supervised high-value crop autonomy,…

Fencing excellence celebrated

The Fencing Contractors Association of New Zealand (FCANZ) celebrated the best of the best at the 2025 Fencing Industry Awards,…

» Latest Print Issues Online

The Hound

A step too far

OPINION: For years, the ironically named Dr Mike Joy has used his position at Victoria University to wage an activist-style…

Save us from SAFE

OPINION: A mate of yours truly has had an absolute gutsful of the activist group SAFE.

» Connect with Rural News

» eNewsletter

Subscribe to our weekly newsletter