New Zealand's economy was built on commodity exports, and it's likely we will be primarily a commodity exporter long into the future.
Currently we're one of the world's most efficient producers of dairy protein, but if our industry is to thrive in the new marketplace, we'll need to take that efficiency to a new level.
New Zealand is a relatively small producer, with around 3 per cent of global production. In contrast, India is the world's largest milk producer with 16 per cent of global production, followed by the US, China, Pakistan and Brazil, according to the UN Food and Agriculture Organisation.
The US is a good example of what New Zealand will be up against -- a market that is taking advantage of scale, state-of-the-art technology and advances in feed technology to become more globally competitive.
While around 85 per cent of US milk production is used for domestic purposes, exports have been steadily growing and seem likely to continue to do so as US producers invest in manufacturing assets more aligned to the products demanded by emerging markets.
US domestic output is set to be the highest for the fifth year, and some farmers are reportedly dumping surplus milk, but cheap and abundant feed encourages continued high production.
The proliferation of free trade agreements is also providing a platform for intensified global dairy competition. FTAs open access to markets for New Zealand producers, but they also improve access for our competitors.
The Trans Pacific Partnership, for example, includes 12 nations covering 40 per cent of world trade. Across the Atlantic, protections within the EU are evaporating as farmers adopt a more competitive footing.
For New Zealand producers, the message is that they must be more competitive in producing the product -- even if they intend to later add value.
Based on DairyNZ figures, ANZ estimates the average New Zealand dairy farm requires a milk price of $4.89/kg for a break-even cashflow in 2015-16, before depreciation. Farm Working Expenses and the cost of owners labour make up $4.40 of this, but it is the range in farm operating efficiency which is the issue.
Even smaller farms are moving towards the sort of formalised business management and decision-making processes used by larger corporate operations.
To see the leading edge, the annual Dairy Business of the Year competition -- of which ANZ is a supporter -- features farmers who are investing in on-farm management, pasture productivity and new technology to drive down the cost of production.
In the 2013-14 season, the top businesses achieved $3.13/kg cost of production including depreciation and owner's labour, and many of the other finalists for the 2015 competition were well below $4/kg.
ANZ's Privately Owned Business Barometer Dairy Insights survey of 368 dairy businesses found reducing costs was a high priority (and likely to have become a higher priority in the months since the survey was taken).
The survey found farmers were taking a balanced approach -- which included redirection of costs to areas that contribute more to profit, and to consider investments to increase production that enhance efficiency.
Over half of the survey respondents were planning to invest more in pasture and forage, improved animal genetics and improved feed budgeting.
This highlights an issue for the industry -- farmers will need to invest to increase efficiency, and this requires cash.
The Dairy Insights Survey provided strong evidence that producers are moving away from intuition to a disciplined investment and management regime, assisted by sophisticated farm system modelling, financial modelling and environmental outcome modelling tools now available from farm management consultants.
Even smaller farms are moving towards the sort of formalised business management and decision-making processes used by larger corporate operations.
For example, more than 10 per cent of the dairy businesses in the Barometer have boards, or similar structures -- a much higher percentage than the commercial sector as a whole.
Despite dairy prices being at the low end of the cycle, I'm optimistic about the long-term prospects for the sector. Growing affluence throughout Asia will see a change towards more Western diets on a large scale and that will underpin industry growth for the next couple of decades.
But while the global opportunities for New Zealand dairy are huge, the competition from new and existing players will only become more intense.
In the end, the market that can produce the best quality product in the most efficient way will reap the greatest benefit.
Graham Turley is Managing Director Commercial & Agri at ANZ.
