NZ dairy faces real test of competitiveness over next five years: Bill English

Finance Minister Bill English has warned the next five years will be the real test for how competitive the dairy industry is on the global market.

There have been long-running discussions within the industry about where New Zealand sits on the international cost curve and other dairy industries are now adopting practices that make them fairly competitive, he told the Dairy NZ Farmers' Forum in the Waikato.

Once global milk prices start to rise again, farmers will get a clear picture of the cost of production and if they're not at that level, some won't last and the New Zealand industry will find out where it really sits on that global cost curve, he said.

The industry has invested a lot of money in stainless steel to process growing milk volumes but over the next five years farmers will be faced with investment in things they can't see and will be largely offshore in order to be globally competitive, he added.

"There was a long phase where we focused domestically on the structure of the industry which we thought would determine success. It does have an impact but it's by no means the only thing," he said.

One of the big government priorities in the next five years is resolving the question of water allocation which has been under debate for the past seven years.

Mr English said there could be a high cost to New Zealand's economy if new water policies stopped more intensive farming and higher production. "We could end up giving up a lot of GDP," he said. But if the government gets it right, there could be those benefits coupled with the development of new uses for the water and maintaining the country's branding around sustainability and clean water.

"Seven years ago there was war by press release by Federated Farmers and environmental groups. Now there is deep, rich discussions that are tense, there's no doubt it is, but that is forward and progressive-looking," he said.

There were also changing attitudes to debt within the dairy industry, although he added the government couldn't lecture anyone on that front. He pointed to state-owned Solid Energy which was once valued by its board at $3 billion and is now negatively valued at the cost of the environmental liabilities to clean up its mines.

Given there's likely to be another season of low milk payout and not a lot of cash in the bank come spring, Mr English said that's likely to recalibrate the dairy industry's attitude to debt. He warned high household debt is also an issue that needs to be tackled given rising house prices and the inevitability interest rates will eventually increase.

Rabobank food and agribusiness research and advisory head Tim Hunt said one of the lessons from the latest dairy downturn was in high debt levels worldwide. While in some parts of the world dairy competitors paid down 25% of their debt during the peak when global dairy prices were high, that didn't happen at the same level in New Zealand.

"This is the third dairy downturn since 2008 and we're likely to see this again even if the medium-term outlook is generally better. We've learnt we could make decisions in the better times that give us more confidence in the next downturn," he said.

Mr Hunt said one of the other lessons was that free-trade agreements will only go so far as New Zealand's experience with China shows. When things got nasty in China and they pulled back on demand, New Zealand was last in the queue, he said. "Sometimes it's not enough to be the lowest-cost provider."

Hunt is predicting the downturn in global dairy prices will last well into the next dairy season and it will be another low payout year though medium-term prospects look brighter with milk prices and demand rising.

Fonterra Cooperative Group chief executive Theo Spierings said he expected New Zealand's milk production to rise from the current 20 billion litres to 25 billion by 2020 while the globally traded dairy market, which informs the milk price, is likely to rise by 5.5% a year to 91 billion litres from 66 billion.

He said it was important to allow farmers to continue expanding production or else New Zealand will lose scale and relevance in global markets with Fonterra able to shift the extra volume to value-add products – something it has proved it can do in the past two years.

Fonterra has a target of shifting from value add accounting for 8% of its total milk pool to 17% or $5 billion by 2023.

Mr Spierings said the cooperative's strategy involves "staying on course" to drive volume and value-add, defending its global market share against increasing competition, and getting better at "telling its story" both domestically and overseas "rather than letting other people tell it for us."

(BusinessDesk)