September 26, 2017

New Zealand Running out of Room to Grow

 |  By: Fran Howard

Over the past decade, the world dairy industry has expanded significantly despite strained margins that have intermittently plagued dairy producers and surplus global milk powder supplies that have worked to weigh on world milk prices. But that is about to change, says Sarina Sharp, agricultural economist with the Daily Dairy Report.

“New and ongoing regulations are likely to reduce the opportunity for growth in a number of dairy hot spots going forward, while lack of processing capacity is likely to slow expansion in some of the former rapidly growing dairy regions in the United States,” says Sharp. “However, New Zealand, in particular, seems to be running out of room to grow.”

In the 2015-16 season, the New Zealand dairy industry used 1.75 million hectares of land, up 32% from 1.33 million hectares in the 2000-01 season. The increase in land use, however, is well below the 43% jump in milk cow numbers that occurred over that same 15-year period.

“As a result, New Zealand's dairy pastures are now more densely populated,” Sharp says. “And that has attracted the ire of both environmental groups and the tourism industry, New Zealand's second-largest economic engine behind dairy.”

Stricter environmental regulations in New Zealand are expected to add to the cost of expansion, further slowing growth. “Tighter land-use regulations, which will take effect in coming years, are already having an impact,” Sharp notes. “The Canterbury region on the South Island, for example, has experienced some of the fastest growth in milk production over the past two decades, and it is the nation's most dense dairy region, with 3.4 cows per hectare in the 2015-16 season, but new rules on manure leaching are driving a slowdown in permitting.”

For the 2016-17 financial year, the Canterbury region granted just 20 permits for new dairies, according to Environment Canterbury. That's the least number of permits granted since 2006-07 and 82% less than in the 2011-12 season, when permits for new dairies peaked at 110, Sharp notes.

“The new rules in New Zealand are so strict that some believe they are unachievable,” Sharp says, adding that Environment Canterbury has said the region won't be able to meet its water-quality standards for Lake Ellesmere without shutting down nearly every dairy in the surrounding district.

“Such drastic measures are highly unlikely, but clearly rampant dairy industry expansion stands at odds with the goals of environmentalists and regulators,” Sharp says. “And self-imposed limits on production practices, like Fonterra's stance against palm kernel expeller, will further reduce New Zealand dairy producers’ ability to respond to higher dairy product prices by producing more milk.”

In a recent report titled Survive or Thrive, Rabobank says it expects growth in New Zealand milk production to slow noticeably over the next five years. Investment in new farm conversions and expansion of existing operations have already virtually trickled to a standstill, the report states.

“A slowdown in New Zealand milk production growth is not to say that expansion in world milk production will be limited, but the drivers behind much of the growth over the past several years—New Zealand, the Netherlands, and much of the United States—will likely be relegated to the back seat,” Sharp states.