“It’s dairy, it’s ruining everything,” he complained to his nodding customer. That’s certainly one perspective. You might hear another from environmentalists: “dirty dairy”.
Those two views suggest not everyone is happy with one of the most remarkable economic stories in New Zealand’s history, one rivalling the Australian commodity boom: the White Gold Rush. Dairy production, primarily for export, primarily to China, is booming in New Zealand.
Since the signing of a Free Trade Agreement in 2008, New Zealand’s exports of beef, sheep, seafood, dairy, forestry and wool to China have all surged. China is now New Zealand’s largest export market and export growth has been compounding at 23 per cent per annum since the FTA. More than half New Zealand’s wool and forestry now go to China.
It is dairy though which has benefitted the most. “We have seen dramatic growth in dairy,” ANZ’s managing director commercial and agri Graham Turley told BlueNotes on the sidelines of Fieldays. “It has been driven by two things, land use conversions – largely from forestry and red meat – and intensification. There has been a huge productivity gain, from around 290-300 kg of milk solids per cow to around 400.”
Overall dairy production in New Zealand has tripled since 1990, a compound growth rate of 5 per cent per annum. As a share of total exports, dairy has nearly doubled from 16 to 29 per cent over the same period.
And that’s where the issues arise. Some worry New Zealand is now over-exposed to dairy and China’s demand for dairy products in particular. Others worry this intensification of dairy production is not environmentally sustainable.
“These are important concerns,” says Turley. “The environment is becoming a bigger issue globally, with global warming and other factors, farming intensity is increasing and China is a bigger and bigger part of the business – although with China we are comfortable that over the longer term the demand for more protein and higher quality food will increase.”
These are issues to which New Zealand prime minister John Key is very alert. He told BlueNotes in an informal chat at Fieldays his government was sensitive to the exposure to China but this didn’t mean it was wrong to pursue the market offering the highest prices and most growth.
That said, Key is also focussed on growing more traditional markets like Korea and Japan and developing emerging markets such as Indonesia and India – particularly through proposed regional trade agreements.
He told BlueNotes New Zealand’s soft commodity boom was different to Australia’s China-driven resources boom because food was a commodity where growth would be continuous – unlike iron ore which depended on infrastructure development and urbanisation.
“The critical thing though is to make sure our industry is trusted and sustainable,” he said.
That’s where environmental concerns come to the fore.
With dairy intensification in New Zealand comes the danger effluent run off and land degradation can damage the country’s brand of “100 per cent Pure”, one of the most successful clean and green campaigns globally.
New Zealanders are also extremely sensitive to the environment, particularly waterways given the popularity of fishing and boating and other activities.
Bridgit Hawkins, chief executive of effluent management specialist ReGen, says regional councils have become increasingly active in enforcing resource management legislation and have levied hefty fines to farmers found to have breached compliance, typically by allowing effluent run off into waterways.
“When you have fines of $NZ50,000 or $NZ60,000, farmers are really scared,” she says. “The whole compliance thing has taken off in the last year, there is much greater visibility with the rules.” ReGen provides technology and services to monitor effluent and demonstrate compliance.
Critically though, for the industry as much as the environment, if New Zealand’s white gold rush is to continue, productivity must improve. And effluent is actually a valuable resource which when captured and used well can dramatically increase farm productivity, even push a farm towards an ideal “closed loop” where dairy effluent is used on pasture and crops which are then fed back to cows.
“Effluent has a high nutritional value and when it is used well – sprayed at the right times, when soil and water conditions are right – then you are talking about substantially cutting the nutrient loss on your farm,” Hawkins says. “And that means lower costs of other inputs.”
The environmental challenge is difficult because simply being perceived as green is no longer a competitive advantage for any country – for any premium agricultural exporter it is simply a must.
“You have to be green to compete but we’re not the only country that can do this, Ireland can do this,” says Turley.
Meanwhile, as dairy becomes more productive the pressure on red meat producers increases as to date traditionally important beef and lamb farmers haven’t enjoyed the same successes as dairy.
Legendary New Zealand businessman William Gallagher of the Gallagher animal management and security conglomerate told BlueNotes he believed a crucial difference was the dairy industry had turned its cooperative organisation, Fonterra, into an effective research and benchmarking forum as well as a marketing and sales body.
“The red meat people have lagged but I think the younger generation is coming up, they are better educated, more sophisticated but it is also true there is a bigger difference between the bottom end of producers and the top end with red meat,” he says.
“Fonterra is a very good organisation but in New Zealand red meat, while it is coming up, is not so well organised or coordinated.”
Meanwhile the exposure to China is a double edged sword. As Con Williams, ANZ’s rural economist, says, concentration risk is one thing but it would be foolhardy to ignore the demand from China and the returns on offer.
“How much is too much? Well it’s hard to turn down these prices,” he says. ANZ forecasts an even higher floor price for soft commodities this year albeit with volatility.
In the last six years New Zealand’s main export markets have changed rapidly, mainly driven by the rise of China which overtook Australia as New Zealand’s largest export destination in November 2013 (A position Australia had held since 1989).
China is the now the largest earner for 11 out of 21 of New Zealand’s major primary sectors. For the remaining 10 sectors it ranks either second or third for all but one.
But as Key points out, there has also been strong growth in exports to ASEAN and wealthier Middle Eastern countries.
ANZ’s Williams agrees rapid growth in non-traditional markets has brought opportunity – and singles out Malaysia, Brunei Darussalam, Kazakhstan, Azerbaijan, Thailand, Armenia, Indonesia and Vietnam as particularly interesting – but adds as trade matures a deeper understanding of the regulatory framework, business practices and local culture which affects consumer trends, tastes and customer service requirements are needed.
“At the moment New Zealand still has a way to go to develop a critical mass of institutional knowledge and expertise in these ﬁelds as it relates to many of these markets,” he says.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.