Rabobank: ‘In NZ dairy, investors will continue to reap rewards’

As dairy prices begin the road to recovery after a difficult year, Rabobank dairy analyst Kevin Bellamy asks whether investors should be looking at New Zealand.

China is again buying New Zealand milk, and prices are forecast to rise. However, with global oversupply just beginning to recede, New Zealand’s dairy market is expected to contract this year for the first time in at least 15 years. Agri Investor caught up with Rabobank Global dairy strategist Kevin Bellamy to find out what the future holds for the sector, and what this means for investors.

What is the forecast for New Zealand dairy?

New Zealand farmers have been really struggling with milk prices. They have had two bad seasons for explainable reasons but looking at global supply and demand models longer term, prices are likely to rise. In the 2013-14 season Fonterra’s milk price was NZ$ 8.40 ($5.56; €5.12), while in the 2015-16 season that is forecast to be NZ$4.15.

In January 2016 China started to buy again, back almost to 2014 levels. The 2008 China-New Zealand Trade Agreement and New Zealand’s low cost of production mean that New Zealand will remain the dominant supplier. Over time Rabobank anticipate that China will continue to be the largest importer of dairy products, despite remaining 85 percent self-sufficient in dairy, as dairy consumption continues to grow at an annual rate of around 2.5 percent.

What are the constraints on growth in New Zealand dairy?

New Zealand has been expanding its milk production at around 2.5 percent a year for the last 15 years. This year, we will have a decline in production for the first time in that period as farmers cull unprofitable cows early to save money.

The country is also probably reaching its land capacity. New Zealand dairy farms achieve their low-cost advantage through grazing, which means adding more cows and adopting more expensive intensive farming is not an option. This is partly because any intensification would increase environmental impact, potentially damaging New Zealand’s other major revenue source, tourism. We are seeing more voluntary farmland sales now within the market suggesting the downturn has hurt some businesses, but we are not seeing forced insolvencies.

What does this mean for investors?

Although the rate of New Zealand production and export growth in future years might slow as land becomes a constraint and converting new land to dairy becomes more costly, New Zealand farms are still able to produce the lowest priced raw milk in the world.

As the industry has developed, the farms have got bigger, with the average herd size now above 400 cows and many farming companies owning multiple holdings. These businesses achieve economies of scale which make them highly attractive assets for investment despite the low downward price cycle we are currently in.

With global demand for milk forecast to continue to grow at above 2 percent in the medium term New Zealand will continue to be a great place to produce milk.

Aren’t there better alternatives?

The sale of Van Dieman’s Land [in Tasmania], which started out as a sheep station and became a multiple herd dairy company, got people comparing the land to New Zealand. Australia weathered the price storm because of the domestic market which kept prices higher. But I think people will still be looking at New Zealand as the world market recovers. It’s not a case of a better market; it is a different market. New Zealand is an incredibly cheap place to produce milk in world market terms, so I think it will continue to be a popular investment destination.