Dairy industry says thankful goodbye to a tumultuous year — will 2024 be any better?

New Zealand dairy export revenue is forecast to rebound to $25.5 billion in the next two years.

Less milk, more optimism and continued inflation skimming off the cream. That’s how the $26 billion export dairy industry might sum up the outlook for 2024 in an uncertain world promising another testing year for all players.

The sector is taking a deep breath after a rollercoaster international milk price and farmer payout year, mostly due to the global economic slowdown but also fuelled, some industry insiders say, by inventory sales behaviour and erratic milk price announcements by industry heavyweight Fonterra.

While opinions on the year ahead vary in openness and nuance, there’s general agreement there’s cause for a little optimism about returns, and that New Zealand will produce less milk — supply has been flatlining anyway, but the forecast dry El Nino summer will see to that.

Apparently, market demand is strengthening for dairy products, Fonterra reckons China’s come online again for commodities in the first quarter of FY24, and the export fundamentals are looking better, along with prospects for farmgate returns. However, it’s anticipated that inflation and its impact on operating costs will continue to burden farmers and processors.

The country’s second-biggest processor, Open Country Dairy, anticipates gradual, consistent improvement in global protein demand into the next calendar year.

Chief executive Mark deLautour said while market volatility could be expected given the conflicts in Gaza and Ukraine and the upcoming United States presidential election, the fundamental drivers for New Zealand food exports should strengthen.

“Base ingredient products should perform well in the coming 12 months. Other dairy ingredient producers — Australia, the EU and USA — are reducing volumes and New Zealand will be in a good position to leverage this,” he said.

Fonterra, the country’s biggest business, said it had seen a strengthening in demand for commodity products from key importing regions, including an improvement in demand from China.

In response, the farmer-owned co-operative in early December increased its farmgate milk price and earnings guidance for FY24. It said supply and demand was balanced.

“Major exporting regions — EU, US and New Zealand — all expect to have flat milk growth, which would traditionally be supportive of prices. China supply for local milk remains the biggest influence in terms of price direction, with supply starting to show signs of rebalancing to demand, and local whole milk powder inventories reducing,” Fonterra said.

Open Country’s deLautour cautioned that while global demand was improving, consumers were “very price conscious and high-end branded products will likely remain under pressure”.

Fonterra echoed this, saying demand remained “the biggest unknown” with interest rates and inflation likely to weigh on consumer demand and market sentiment.

Fonterra says supply and demand are "currently balanced".

The Ministry for Primary Industries isn’t quite so convinced the immediate outlook is rosier.

Its latest situation outlook report for primary sectors forecasts dairy export revenue to fall by 7 per cent to $24.1b in the year to June 30. It said this would be driven by a combination of weakening demand resulting in lower global dairy prices, and a likely drop in export volumes due to lower milk production.

The ministry noted the forecast decrease was off the back of record export revenue of $26b in 2022-23, up 18 per cent on the previous period. But its report went on to say global dairy prices were expected to improve in 2024-25, with export revenue forecast to rebound 6 per cent to $25.5b.

Fonterra farmers better off

At farm level, Waikato-based consulting agricultural economist Phil Journeaux is also cautious.

“There is a degree of optimism creeping back into the industry, but things are very tight out there,” he said.

“There’s an expectation next year things are going to be better than this year, largely around the expectation [milk] payout will be better. "

Costs were still rising, but the pace of increases had slowed markedly.

In the past three years, on-farm inflation had risen 27 per cent, he said. Farmers were not confident interest rates would come down anytime soon.

A Waikato model dairy farm Journeaux oversees would be paying $110,000 more in interest than a year ago.

Fonterra farmers were doing “significantly better” than those who supplied other companies that didn’t require share purchase to supply, and better than sharemilkers, Journeaux said. This was because Fonterra farmers had received a capital repayment during the year and a dividend.

“The average Fonterra farmer has probably passed the break-even point now. A number will actually pay down some debt too. Whereas non-Fonterra farmers and sharemilkers are still looking at a negative end-of-year situation, so the screws are on them not to replace vehicles etc.”

Industry body DairyNZ recently updated the national break-even forecast to $7.79/kg milksolids, from $7.78/kg.

Open Country’s deLautour said the company made full payments for milk to suppliers four times a year, helping protect them from the full interest rate impact and lowering their total on-farm cost burdens.

Journeaux expected New Zealand milk production to contract over the next decade. The country had “reached peak dairy” with environmental regulations and pressures ensuring dairy farming did not expand, he said.

And deLautour expected milk supply to decline slightly next year.

“Land use change and regulatory pressures will see farm numbers drop further, however, technology can lift output per animal in both an environmental and economically sustainable manner.

“While slightly reducing supply may lead to some positive supply-demand pressure, farmer and processor profitability alike will remain tight as a result of the inflationary pressures in New Zealand,” deLautour said.

“Tight cost controls, a focus on increased productivity, a robust balance sheet and good cash flow management will be required. A return to good business fundamentals in 2024 will be required.”

He noted that as the dairy season runs from June to May, the 2023-24 season still had 50 per cent to run when it entered the 2024 calendar year.

“Our current forecast communicated to suppliers has the second half of the season, from December, generating improved returns relative to the first half,” deLautour said.

Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.