New Zealand’s $21 billion dairy industry has been jumping through the hoops of change as much as the rest of us, but Manawatu farmer Andrew Hoggard reckons if his farming grandparents returned today by time machine they’d still be able to work his farm.
“If they had written instructions how to turn the plant on and where the cows were they’d probably be able to work it out quite easily. The fundamentals stay the same,” says the national president of Federated Farmers.
“Rotate the cows round the farm and get milk twice a day. The same calls my grandad used will get the cows in. Things look shinier and there are a few add-ons but fundamentally, it’s the same job using better tools.”
That said, Hoggard and other leaders of New Zealand’s biggest export earning sector (23 per cent of total export values) know the decisions they make now, and the tools they choose next, will determine their industry’s tomorrow as they confront a new wall of change.
National milk production has flatlined and is expected to decline. By how much, no-one’s willing to estimate.
Globally, food production is “getting harder and harder”, says DairyNZ chief executive Dr Tim Mackle.
Water supply is under threat. In the US some aquifiers are becoming “seriously challenged”, he says.
“There are difficult choices to make about how water is used.”
Weather events tend to be extreme. Geopolitical tensions have escalated, affecting food supplies and supply chains and causing market uncertainty and anxiety. The pandemic has unleashed inflation. Farm costs have rocketed, some inputs by 200 per cent. Climate change is reckoned to be a crisis situation - in New Zealand convincing the government it should be a global agricultural trailblazer by being the first to tax food-producing farmers on their carbon emissions.
The milk processing industry is entering its most competitive phase since the formation of sector heavyweight Fonterra 21 years ago, says Richard Wyeth, chief executive of Westland Milk Products.
“Companies will have to be incredibly efficient in order to be able to pay farmers and retain milk supply. The next five years will be very challenging. All businesses will need to be very well-run to survive,” he says.
“Going out 20 years it’ll be only those businesses able to create sufficient value to look after not just farmers, but shareholders as well, that will last.”
Fonterra, despite collecting 79 per cent of the country’s raw milk (in 2001 when it was created from an industry mega-merger its market share was more than 96 per cent), is having to reform its capital structure to ensure it has enough milk in the future. The co-operative, New Zealand’s biggest business, requires farmers to buy shares to supply milk. The capital rejig will make that cheaper and ease pathways to supply.
And almost every season on their farms, dairy producers are confronting climate change.
As always, there’s yin and yang with this scenario.
Global milk prices, on which New Zealand’s milk price is largely predicated, are robust, with demand for dairy strong while the world milk supply has eased.
The industry expects this situation to continue for some years. That’s good for farmers and the New Zealand economy, of which dairying is a cornerstone, but the flipside will be continuing pain for consumers at the supermarket checkout.
DairyNZ’s Mackle says New Zealand’s dairy industry “will get the future we build from here”.
“At DairyNZ we are aspiring to have our cake and eat it too – why not? Why not have a lower carbon footprint and produce as much, if not more, high-quality, delicious dairy food? Our vision for the future and our purpose is to deliver a better future for farmers but also to increasingly understand the impact we have on wider New Zealand.
“If we look at the next 10 to 20 years, I have a very optimistic view of dairy’s place in New Zealand and as a (global food supply) contributor.
“We’re part of the global food system and I think it will continue that way, the proviso being that while the future is incredibly bright we must realise those opportunities will be dependent on how we manage the next five to 10 years.”
Mackle says that job isn’t just up to the government, though he’s no fan of its current proposal on how to tax agriculture’s greenhouse gases.
“We need positive incentives for people in food production, not negative settings. Capturing those big opportunities for (providing) really high-value premium dairy in part will come down to how difficult we make things for ourselves.”
What’s a “negative setting”?
“Right now the government settings are a direction that starts to challenge the production of food, and carbon leakage starts to come into play. The New Zealand public has started to cotton on to that. Why would we produce less food for someone else to produce more carbon?
“That doesn’t help the world. It might help the government’s credentials in terms of its commitment (to lowering greenhouse gases).”
Mackle says the sector must also ensure its future by thinking differently about attracting and retaining people, an issue confronting many sectors since the pandemic.
“We have a strategy called Great Futures in Dairy. It has three conclusions. We need to shape up to make sure our conditions are where they need to be; change the job to make it easier and more sustainable with flexible work and more use of technology; and get more diverse by looking in other places for our people.
“Auckland is a big target. But we just cannot move forward without a good immigration system to bring in talent.”
Mackle says New Zealand’s future is in new opportunities in naturally-grown plant and free-range animal food production fuelled by sunshine and rainfall - not in synthetic food with proteins cultivated by fermentation.
Like other sector leaders, he believes value created by new products, different dairy product mixes, and advances in science and technology will offset any decline in milk production – and help meet climate change challenges to farming.
Cows will be bred to be more productive and efficient, grasses will change in some regions with a greater range of forage crops, farming systems will adapt to provide regional resilience and calving patterns will change (autumn calving is already on the increase, particularly in the North Island).
Fonterra chief executive Miles Hurrell doesn’t believe the milk drop will be “significant”.
“While you will continue to see land use change and regulatory environmental pressures ... remove milk from the landscape, at the same time there will continue to be efficiency gains with the same number of cows, whether it be through genetic gain or feed improvements or whatever.”
He notes while Fonterra’s share of the raw milk market has fallen by around 15 per cent since the co-operative’s 2001 creation and the debut of processor competition, the amount of milk it has collected in that time has gone up by 33 per cent.
Milk has peaked, is flat and “maybe declining”, he says.
What could this mean for Fonterra’s 29 processing sites employing about 9000 people around New Zealand?
Hurrell notes some plants were inherited in the industry mega-merger and some are aging.
“Are they the right asset mix and product for today and the future? Probably not. If we see milk declining in a certain part of the country, does that mean we have to rationalise our facilities over time? The answer is yes, we will.”
He says under the special legislation which enabled its formation, Fonterra must accept all milk offered to it, though from next year it can turn away new milk, or supply from farmers who want to return to the co-op.
The requirement is a two-edged sword. It has secured Fonterra dominance in the raw milk market, but during the late 1990s and 2000s when New Zealand milk production boomed, it meant Fonterra had to find big money for new stainless steel to process it.
“The milk curve more or less mirrors grass growth,” says Hurrell.
“We have a very high peak (in October) which is unique to New Zealand. So if we get to a situation where peak milk is down and we don’t see that peak requirement (for plant) we will have to start making decisions around rationalisation of plants.”
Fonterra’s not there yet, he says, but it had made the call to next year close its Brightwater site near Nelson. Milk instead will go to Fonterra’s big Clandeboye and Darfield sites.
Any decisions on closures would reflect proximity to other plants and the product mix required by markets and customers.
Fonterra’s last significant plant build was nearly a decade ago.
Hurrell says it has no plans to build any new sites, though capacity could be added to existing sites to make specialised products such as mozzarella or cream cheese.
The country’s second biggest dairy processor and exporter, New Zealand-owned Open Country (with 9 per cent of the raw milk market against Fonterra’s 79 per cent) agrees the days of throwing up new stainless steel are over.
“There will still be a reasonable amount of investment - we have just built a lactose harvesting factory for $20 million and another $15 million plant in the south - but it’ll be nothing like the last decade, no more massive facilities costing hundreds of millions,” says chief executive Steve Koekemoer.
He’s in no doubt milk supply will decline.
“The question is how we manage that to become a more efficient milk-producing country. The industry has been going down that path anyway, it’s been brought about by competition.
“Competition drives performance and innovation to take on the international market.”
Like other sector leaders, Koekemoer believes dairying has a bright future.
“It’s a great source of nutrition. Substitutes will come onto the market, but there will always be people wanting good quality nutrition from animal products.”
While he too believes product mix will change and processors may focus more on product that achieves high returns like butter, he’s not for a minute suggesting New Zealand’s big commodity export success, whole milk powder, is not valuable.
“I have to keep reminding people whole milk powder is not a cheap product. It’s a very high-value product and the most efficient way to get high protein into an export market. You put it in a bag, it lasts 24 months and can be used in many different food applications.”
Hokitika-based Westland Milk Products, with 3.4 per cent of the raw milk market, will now only invest in value-added product manufacturing, and is looking to retire older plants, says chief executive Wyeth. Founded in 1937, Westland was a struggling cooperative until China’s Yili Group bought it in 2019.
Fonterra spends up to $500m a year just maintaining its current sites, says Hurrell.
“On the hypothesis” that the milk price will continue to be strong due to demand outstripping milk supply, Hurrell reminds us that if prices get too high consumers will simply switch to another protein source.
“Economic drivers come into it. You may start to see different countries start to produce milk and depress the price.”
Also to be considered, he says, is that as an exporter of 95 per cent of its dairy production, New Zealand is vulnerable to the whims of international markets and geopolitical events.
“We talk about (selling to) wealthy countries like the US and northern Europe, but entry is restricted so we are obliged in a lot of cases to operate in markets that may not be as politically stable. That will also play a part in keeping prices potentially in check.”
An example was Sri Lanka, which Hurrell calls “a wonderful market”. Fonterra took an $80 million haircut there this year due to its economic situation.
He also notes New Zealand dairy products have access to just 12 per cent of global dairy consumers where tariff rates are less than 10 per cent or without a non-tariff trade barrier.
Dairying leaders have mixed views on whether farms of the future will be bigger with more corporate ownership, or like today, mainly family-owned.
Hurrell says people think Fonterra is bristling with corporate farmers, but they’re wrong. Most of its 8000 farmer-shareholders are families, though the ratio was not available to the Herald.
Independent processors, unlike Fonterra, don’t require farmers to buy shares to supply. They believe share buying days are numbered. Hurrell disagrees.
“It’ll become an economic decision for them under our new capital structure … it gives farmers a choice what to do with their capital.”
And while the industry doesn’t see any room - or milk - left in New Zealand for new processing entrants (Waikato is particularly crowded with more than 12 operations) it’s generally agreed Fonterra will continue to be the big cheese.
Hurrell doesn’t doubt it.
“It comes back to the decisions farmers will make if we continue to perform and make their jobs easier. Being a cooperative means we are an extension of farmers’ farms. The investment they make (in Fonterra) is minor compared to their investment in their land and cows.
“They have a perishable product that needs to be collected every single day. That is the heart of what we do – remove the risk for farmers. The value of the co-operative will always be there for them.”
Will dairy farming still be profitable in 20 years?
DairyNZ’s Mackle: “I certainly hope so. The key thing I would say, and this could irritate one or two farmers, is we are still leaving money on the table now.
“There is a lot of opportunity to do better with our assets. We are the world’s best, but that doesn’t mean there isn’t opportunity to improve.
“But we have to have the aspiration that by doing things better we will be better rewarded as a country. That’s going to take effort from everyone to realise that. Not just farmers but the people selling our product, the companies and the government.
“We need to support the industry, not hinder it. Our future is fantastic I think. The opportunity for young people is tremendous.
“It’s almost our game to lose.”
One day up and the next day down.