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Rural lender Rabobank is warning that high farm prices and other financial issues present challenges for New Zealand dairy farmers wanting to boost production to take advantage of increasing global demand.
The comments, in a new report released yesterday, follow this week's Reserve Bank statement that agricultural land prices had become "excessively high" and that some dairy farm profits could actually be increased by cutting production.
Rabobank said that despite weaker global prices, the outlook for dairy exports remained "resoundingly positive".
Growth in sales was likely to come from "developing countries with increasing affluence moving towards more Westernised diets and recognition of the health benefits of dairy products".
Rabobank expected 3 per cent annual growth in the global market over the medium term.
Rising oil prices could further increase demand in the Middle East, which now takes about a quarter of New Zealand's whole milk powder and butter exports, Rabobank said. Annual sales to the region exceeded $1 billion for the first time in the year to June.
But high land prices in New Zealand and a lack of understanding about supplying milk under contract to Fonterra - which does not involve buying co-op shares - could restrain dairy farmers' ability to boost production, said report author Hayley Moynihan.
The Reserve Bank's report said a higher dollar and weaker export prices would continue to put pressure on farm profits generally, while costs had also risen.
