New Zealand’s agricultural sector is highly productive, and has punched above its weight for decades. Before 1973, when the UK joined the European Economic Community (the precursor to the EU), privileged access to British markets for lamb and dairy products gave New Zealanders a high standard of living. After 1973, when New Zealand lost UK preferential trade treatment, it aggressively developed new export markets for its goods. Almost uniquely for a developed country, New Zealand’s farmers do not receive agricultural subsidies and can count on few direct government supports.
The country has developed one of the most productive agricultural sectors in the world. The productivity is enhanced with agricultural marketing savvy, for example rebranding the “Chinese gooseberry” as the “kiwifruit,” and then catering to higher European and American demand. Agricultural products make up of over 60 percent of the country’s exports; aside from dairy products, New Zealand is also a top exporter of wine, beef, sheep meat, apples, and apples.
Milk has been referred to as “white gold” for New Zealand, and the country has been referred to as the “Saudi Arabia of milk.” In some ways, calling New Zealand the Saudi Arabia of milk is quite apt; the country’s roads are full of vast tankers carrying the white liquid, and its dairy refineries are nearly as large as oil refineries. In 2013, the world’s largest dairy spray dryer was put into operation in New Zealand, with the capacity to produce 30 tonnes of milk powder per hour so that it can be shipped longer distances. The country has been nearly unrelenting in raising milk production.
New Zealand has ramped up milk production
New Zealand has been exporting dairy products since 1846, only six years after the British Crown declared sovereignty over the archipelago through the Treaty of Waitangi. The sector has a long history of consolidating dairy production. Just as certain high oil producing countries are dominated by a single large corporation, New Zealand’s dairy production today is largely controlled by a company that was created with the blessing of the government. Fonterra is a dairy cooperative that formed in 2001 from the merger of two of New Zealand’s previous largest producers; currently as New Zealand’s biggest company, it processes about 80 percent of the country's milk. Aside from the temperate climate, the country’s dairy industry has benefited from having a large company willing to make investments to improve production.
Demand in China drives New Zealand production
Like its neighbor Australia, New Zealand has profited from a nearly insatiable Chinese demand for commodities over the last decade. Minerals make up a large proportion of Australia’s exports to China, while New Zealand mostly exports agricultural products. Partly as a result of Chinese demand, New Zealand’s GDP grew at an enviable 2.53 percent on average per year from 2001 to 2015, accounting for inflation; by comparison, US GDP grew 1.83 percent per year on average over the same period.
As Chinese consumers got richer in the last few decades, demand for animal products, including dairy, has increased. Although milk has long been seen as nutritious, few Chinese have been able to enjoy it on a regular basis. Only in recent decades, as China increased production and improved the cold chain system, could more people find dairy products. It’s not just fresh milk; the rise in infant formula use in China has been linked with a shifting labor market. As more women enter the workforce, mothers have wanted the flexibility provided infant formula. Since 2000, Chinese consumption of dairy products—much of which in the form of milk powder—has more than quadrupled.
New Zealand’s dairy farmers ramped up production to meet this demand growth. Meanwhile, a particular event made Chinese demand for foreign milk powder really soar. In 2008, a safety scandal broke out in a major Chinese dairy producer. In order to fool protein tests, the company mixed melamine, a chemical ingredient derived from coal, into its milk. The contaminated milk caused kidney failure in at least six infants, and sickened over 300,000 babies. The company declared bankruptcy and the government handed out death sentences, but that wasn’t enough to placate consumers, who lost trust in domestic brands. As a result, foreign milk powder producers found that they could charge significant premiums when they sold to China.
New Zealand's dairy exports to China have grown significantly since 2009, especially in the form of milk powder
The size of the New Zealand dairy herd in 2016 is over double that in 1990. At least 300,000 hectares of land has been transferred to dairy use from other types of farming and forestry in the past decade, which has also pushed up the cost of agricultural land prices. And as of 2014, the country had nearly NZ$1 billion (about US$690 million) worth of dairy plants under construction. (The impressive spray dryer was put into operation in 2013, and the country is still building more.) While the duty-free shops in other countries might feature alcohols and cigarettes, the Auckland Airport prominently features displays of milk powder. Much of the higher marginal production was exported to China, especially after 2008.
China has significantly increased dairy consumption, especially in the form of milk powder. In 2009, demand dropped after the first of several milk safety scandals. That demand has slowly recovered, and imports of foreign milk powder have increased because they’re seen as more safe.
New Zealand benefited from being seen as a source for high-quality milk; it has high safety standards, and its milk cows are fed grass instead of grains. Dairy farmers have taken advantage of the country’s well-perceived brand and invested in greater production. According to USDA data, New Zealand farmers added 450,000 tonnes of capacity after 2008.
The milk bubble pops
After surging for over a decade, milk started to slide by the beginning of 2014. Between then and 2016, farm gate milk prices in New Zealand have fallen by half.
There are several reasons that fewer markets are interested in New Zealand’s milk. First, a general economic slowdown in China has reduced the market that has been so friendly to New Zealand farmers; between 2014 and 2015, Chinese imports of dairy fell by roughly a sixth. Second, the EU recently abolished dairy production quotas, which led producers to expand output and exports. Third, Russia’s ban on EU producers has forced European producers to sell to other markets. And finally, the higher prices have also enticed US dairy farmers to produce more as well; US output has been the highest ever for five straight years. Given this increased global competition for dairy export markets, prices declined and the New Zealand dairy industry started to suffer.
After investing massively in greater production, New Zealand’s dairy farmers are starting to feel the pain of softer demand. The size of the dairy herd has faced two consecutive year declines after it grew for over 20 years. According to the Real Estate Institute of New Zealand, the median price per hectare for dairy farms fell 13.6 percent between May 2015 and May 2016. Even the New Zealand central bank has warned that farmers’ debt positions are stretched, and that their loan-to-income ratios are approaching high levels. Fonterra has cut its staff just as it moves into its new NZ$100 million (about US$69 million) Auckland headquarters.
In 2015, the size of the New Zealand dairy herd fell for the first time in 20 years
While New Zealand’s economic health looked strong during the boom, the bust has made apparent some of its other weaknesses. In 2014, an OECD report published by the New Zealand Productivity Commission identified a productivity gap in the country relative to other developed peers. New Zealand’s workforce as a whole is relatively unproductive, with the result that its GDP per capita is 20 percent below the OECD’s average, when its policy environment implies that it should be 20 percent above the average. The report suggests that New Zealand has done poorly in “knowledge-based capital” and “international connections.” In other words, this milk boom bears some resemblances to an oil boom; while it made the country richer, New Zealand has done little to improve longer-term productivity problems.
Meanwhile, overcapacity and lower demand have hurt other high dairy producers. Germany, which produces the most milk in the EU, has been hit particularly hard; in 2016, the German government rolled out an emergency package of 100 million euros to help dairy farmers. In the US, farmers dumped 43 million gallons of fresh milk in the first eight months of 2016, while the USDA has pledged more direct price supports by pledging to buy $20 million worth of cheese in October.
While certain New Zealand farmers have felt the pain of declining prices, it can’t compare to the more dramatic economic trauma it faced decades ago. When the UK joined the European Economic Community in 1973, New Zealand had to struggle with losing a major export market for its goods. But the country wasn’t complacent; instead, its government leaped into action, aggressively cultivating new markets, all the while improving the efficiency of its agricultural sector. The country took the impressive step of eliminating agricultural subsidies in 1984; although that policy jolted farmers, it made farmers far more productive in the long term.
The milk market is expected to remain volatile in 2017, and New Zealand’s dairy farmers may yet have to expect more structural changes. But there’s reason to be hopeful for the industry. Dairy prices have ticked up in the latter half of 2016, due to a recovery in Chinese demand (prompted in part by the cheaper prices) and also to lower output from the EU and Australia. New Zealand may well be set up to export more to regions like Africa, where milk consumption is low but growing. In any case, New Zealand has dealt with the loss of significant markets in the past, and it’s also proved adept at cultivating new products to meet world demand.