Why NZ dairy exporters don’t stand to profit from crash in French milk production strength

Two friendly Limousin cattle beasts. The beef and dairy industries have expressed disappointment at aspects of an EU free trade deal's benefits. Photo / Supplied

Alarm in the French dairy industry about shrinking cow and farm numbers with predictions of worse to come is no comfort to New Zealand dairy exporters disappointed with the NZ-EU free trade agreement.

A quarter of France’s dairy producers, 13,000 farms, shut down between 2010 and 2020, according to the European Milk Board (EMB), citing the latest census result from the French agriculture ministry.

EMB also highlighted a French industry forecast that dairy cow numbers would drop by 441,000 by 2030.

It said according to French livestock farming institute IDELE, France had roughly 3.6 million dairy cows and 736,000 heifers in 2020 - 8.2 per cent and 15.1 per cent respectively fewer than in 2015.

While EMB noted some French dairying regions would be more strongly affected than others, at a national level the situation was alarming.

“Milk producers aged over 50 accounted for 32 per cent of dairy farmers in 2010, compared with 48 per cent today, with 28 per cent of them being over 55 years of age.

“According to IDELE, the replacement rate for dairy farmers is a mere 45 per cent, far from the 71 per cent average across all farming sectors.”

EMB said recently published national accounts confirmed 2020 was marred by difficulties for French dairy farmers, including increases in farm expenses, including feed, labour and energy costs, with dairy farms’ economic results continuing to show a decline.

While all this may sound hopeful for New Zealand dairy export prospects, the situation isn’t that simple, said DCANZ, the Dairy Companies Association of New Zealand which represents major dairy processors and exporters, including Fonterra.

Europe and New Zealand are the world’s biggest dairy exporters.

DCANZ executive director Kimberly Crewther said while milk production in France declined 4 per cent (roughly equal to 1m tonnes) between 2015 and 2021, during the same period total EU production grew by 6m tonnes, according to an International Dairy Federation (IDF) 2022 world situation report.

And while the EU Milk Market Observatory reported that for the 10 months to October 2022, EU production was down 0.2 per cent on the same period in 2021, and French production fell 1 per cent, the agency also noted EU production picked up again in recent months.

As for New Zealand dairy exports to the EU, Crewther said “for most products we will continue to face significant barriers to trade” even after the EU-NZ trade agreement takes effect.

“The dairy outcomes from the agreement were limited. These tariff barriers will continue to significantly limit the dairy trade between New Zealand and the EU,” she said.

DCANZ members include Fonterra, New Zealand's biggest business and the world's fifth largest dairy company. Photo / File

The OECD was projecting that out to 2030, New Zealand would have relatively stable milk production and the EU would increase production slightly.

“Within this total EU picture there will be variation across different member countries. The internal trade that occurs between EU27 countries is significant - for example roughly 4m tonnes of cheese is trade between EU members on duty-free terms.”

Crewther said the forecast of limited dairy production growth from New Zealand and the EU sat alongside ongoing demand growth in the global dairy market.

This meant the biggest trade flow impacts were likely to be into other markets.

She said IDF’s world situation report showed while the French dairy herd fell by 146,000 cows between 2015-2021, the Indian dairy herd grew by 11.25m cows.

The EU is New Zealand’s 4th largest trading partner, with two-way trade in goods and services worth NZ$17.5 billion in 2021.

Announcing in July last year the signing of the EU-NZ trade deal, effective from 2035, the Government said was a market offering close to 450 million consumers.

New Zealand goods exports to the EU incurred estimated tariff duties of $115m a year between 2017-2019 (pre-Covid 19), the Government said.

Under the FTA, 94 per cent of EU tariff lines would be eliminated at entry into force of the FTA, rising to 98.5 per cent of tariff lines eliminated after seven years and 91 per cent of New Zealand’s current goods trade to the EU entering duty free from day one.

That would rise to 97 per cent after seven years. Estimated tariff savings would exceed $100m a year on entry into force, rising to $110m after seven years.

The Government said the FTA was expected to increase the value of exports to the EU by up to $1.8b per year from 2035.

It would also open valuable additional new quota access for beef and dairy.

But New Zealand’s export economic cornerstones, the dairy and beef industries, were disappointed with the results of the deal, which fell well below their expectations.

New Zealand’s main agriculture exports to the EU are meat, fruit, beverages including wine, and seafood.

DCANZ chair Malcolm Bailey at the time said the FTA indicated some modest opening up of trade initially, but the Government’s calculations seriously overestimated the benefits.

New Zealand dairy exports would get very little volume improvement, and some volume would still be constrained by quota tariffs, he said.

New Zealand would be able to sell cheese into the EU but its share of the market would be tiny.

The EU had about a 15 percent share of the New Zealand market, but New Zealand would only have about 0.14 percent of the EU market, he said.

The EU deal was completely different from the trade deal New Zealand has with China because “it remains tightly constrained and the ability to grow will not be there beyond these quite small volumes”.