By Keith Woodford*
For some time there has been a view developing within New Zealand that we have too many eggs in the dairy basket. There is also a view that we are over-exposed to China.
I do not share those perspectives, at least when they are expressed in such over-arching and simplistic terms. In contrast, I note that dairy is one of the things we are good at, and that our pastoral dairy resources are not easily put to alternative profitable use.
Yes, we could go back to sheep production, but I do not know where we would profitably sell the increased meat volumes. For beef, there are markets, but most of our beef is a by-product of dairy. It is hard to make money from beef cows.
I also note that China and the Western Pacific Rim are clearly where New Zealand’s economic future lies. With few exceptions, the rest of the world does not need us or want us.
Of course it would be nice to have a more diversified economy, and surely we must strive to achieve this. But there are also some specific realities that we do have to accept, and then work within.
Despite all of the above, I am increasingly concerned about one specific egg within the dairy basket, and that is whole milk powder (WMP). Currently, well over half of our dairy production goes to this one commodity product. In terms of global WMP trade, New Zealand is by far the dominant exporter, followed by the total European Union (EU) at less than one quarter of the New Zealand volume. And China is by far the dominant importer – even in the current problematic year it imports nearly four times as much as Algeria, the next most important country.
There was a time when our WMP exports were more diverse. It is less than ten years since Venezuela was our number one destination for this product. But with oil revenues much reduced, they and other oil-producing countries have stepped back.
In teasing out the WMP story below, for statistical data I have drawn exclusively on the USDA agriculture database as reported at www.indexmundi.com. That data is based on ‘market years’ not calendar years, and these market years vary between countries. Although not perfect, these data are the best that we have. In terms of the big picture it will be reliable. That picture is more than a little worrying.
Over the last fifteen years, New Zealand has not only increased dairy production, it has increasingly focused on WMP. There have been huge WMP processing plants constructed at Clandeboye (near Timaru), Darfield, Edendale, Hawera and Pahiatua. These are the most efficient WMP dryers in the world.
In contrast, New Zealand’s focus on cheese, butter, skim milk powders and other dairy products has decreased in proportional terms.
The USDA estimates New Zealand milk powder production for 2015 at at a little over 1.5 million tonnes per annum. This compares to only 420,000 tonnes in 2000 and 680,000 tonnes in 2008.
In fact, so-called ‘New Zealand milk powder’ is not ‘100% Pure New Zealand’. This is because it contains up to 100,000 tonnes of imported lactose. By international standards, New Zealand milk is low in lactose relative to the natural protein and fat. Rather than removing some protein and fat and using these components in other ways, the New Zealand companies bulk it up with cheap imported lactose.
The other big producer of WMP is China, with estimated production for 2015 at 1.35 million tonnes. However, this year China will also import 600,000 tonnes, up from only 49,000 tonnes back in 2008.
Other big producers are Brazil at about 600,000 tonnes, nearly all of it used internally, and the EU at 800,000 tonnes, of which about 450,000 tonnes are exported.
So the overall global picture of WMP is that it is a minor product in the dairy world. Of total global dairy production, less than five percent is converted to WMP.
Essentially, the global WMP story is about China and New Zealand as the big producers, about China as the big consumer, about China as the big importer, and about New Zealand as the big exporter. Quite simply, there is no future for the current WMP industry without China.
So that begs the question as to how reliable is that Chinese market? And why do the Chinese consume so much milk powder relative to everyone else in the world? Over time will they want more or less WMP?
So far, the answer is that Chinese are consuming more and more WMP. Since 2008, consumption has doubled and is still rising at about six percent per year. But there are reasons to suggest that in the long term Chinese will change their buying habits, like every other country, and change to other forms of dairy.
And if that does happen where will New Zealand be?
Working out how the Chinese actually use all of that WMP is not easy. My estimate is that about 500,000 tonnes goes into infant and follow-on formulas. But that is just a rough estimate. A similar amount may get used in other formats including consumer packs, yoghurt and food service.
Almost certainly, the other big use is in reconstituted UHT milk. But for a very simple reason, there are no reliable statistics on this.
The simple reason is that the consumer regulations say that reconstituted milk should be labelled as such. However, my Chinese sources say that in practice this labelling does not happen. Indeed I have never seen it shown on Chinese milk packaging. So what would happen if the Chinese Government enforced this regulation?
The reason why Chinese milk processors like to use imported milk powder for reconstituted UHT milk is that it is cheaper than using locally produced fresh milk.
As long as Chinese manufacturers keep the provenance hidden, or as long as Chinese consumers accept reconstituted product, then our future is secure. But should the situation change, then we are on the back foot.
The conclusions that I draw from this are that long term basing of an industry on WMP is a high risk strategy. It is one of those strategies that might continue to succeed brilliantly as it has for the last 15 years. Or it may prove to be yesterday’s strategy that no longer works.
There are, of course, other strategies that New Zealand could follow. And to be fair to our major dairy processor Fonterra, there are some other eggs, albeit rather small, that are somewhere there in the basket. One example is the new mozzarella cheese factory near Timaru. This cheese will end up on millions of Chinese pizzas.
Another example is liquid milk, be that fresh pasteurised, UHT or the new ESL (extended shelf life) product. Chinese imports of liquid milk (mainly from Europe) have risen 100 fold in the last seven years from 4 million to 400 million litres. Where will they be in another seven years?
Like almost all value-add dairy, these new products require non-seasonal dairy production to be economic and this means new dairy farming systems. I have previously written about those systems, which we need to be researching and adapting for New Zealand conditions.
In writing this article, my aim has been to stimulate debate, not so much about the overall merits of dairy, as about the specifics of WMP. In conducting that debate, we need to remember that WMP can indeed be very profitable, but that it is no more than a basic commodity. It fits brilliantly with our traditional model of seasonal milk production that follows the seasonal pasture production curve. And it fits brilliantly with the Fonterra skill-set as a super-efficient processor. But in the long term, it may well be taking us down a different path to the course that global consumers are taking. For the long term, it sure seems dangerous to have that one big egg dominating the basket.
Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. This a regular column here. His archived writings are available at http://keithwoodford.wordpress.com.