Dairy sector tipped to deal with EU boost

European Union quotas will be lifted next month, raising the prospect of more production. Photo / Getty Images

Industry faces number of challenges but outlook is still bright, says DairyNZ chief.

The dairy industry is going through a rough patch but it can weather the prospect of increased production - particularly from Ireland - once European Union quotas are lifted on April 1, says Tim Mackle, chief executive of the farmer-funded DairyNZ.

The sector has endured volatile prices, as well as slack demand from its key customer, China.

Product prices dropped by 50 per cent last year, then bounced back in February, only to lose ground again this month.

Several EU countries are expected to ramp up production come April, and many have been producing more in anticipation of the shackles coming off.

Ireland, which like New Zealand exports the bulk of its production, has set its sights on raising its output by 50 per cent by 2020.

Mackle, in an interview with the Herald, said it was clear the industry faced a number of issues on several fronts.

"There is the supply issue in China and the clearance of stock," he said. "Then there is Europe's eagerness, such as the Irish, to play in that sandpit as well."

But Mackle was sceptical about Ireland's ambitions. Raising output by 50 per cent, he said, "would take some doing".

"They have still got some social, economic and structural issues to work through in terms of the size of the farms, landholdings and with beef farmers holding the political power," he said.

"There are socio-economic issues to work through in terms of how they incentivise dairy growth. But quantitatively it's not going to make an impact.

"Cumulatively, in Europe there will be more product available as quotas come off."

On a seasonal level, more product is expected to come on to the market during the northern spring.

Mackle said there were "lead and lag issues" - which involve production taking time to catch up with lower prices. Over time, lower prices will take their toll on US production.

"There is uncertainty in the marketplace right now, but generally I think we will see a slow and steady return [for prices]," he said. "In the medium to long term it is still very, very positive, even with the renewed interest out of Europe."

Mackle said there was a level of confidence about inherent demand from the growing middle classes, in Asia in particular. Expectations are that there will be supply deficits that will be constraints on resources globally. "It's going to get harder and harder to produce more food from a resource availability point of view," Mackle said.

"There are a lot of uncertainties at the moment in the shortish term, but in the medium term it is still looking very positive."

China has 20 per cent of the world's population and about 7 per cent of the world's arable land.

"At the end of the day, they are going to need it," Mackle said.

"So long as we maintain very high standards as to how we produce our food ... then we've got a good story to tell.

"I think it will pay off."