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How important is the dairy sector in the New Zealand economy?

The New Zealand dairy industry has been facing difficulties for almost two years, experiencing a lethal combination of excess supply and declining demand from key trading partners. They include China which weighs heavily on the sector and has brought milk prices down to their lowest ever. Considering the importance of the dairy sector in New Zealand, this situation has greatly contributed to the general stagnation afflicting the country. GDP growth has slowed down and inflation has dropped to almost zero. Employment has also reached deadlock: in the first quarter, growth dropped to 1.70% down from 3.40% the year before. Additionally, disposable income has only partially grown (clal.it and aomarkets.com data).

The dairy sector accounts for more than 29% of the country’s total exports. The first months of 2013 showed promise of continuous growth but then the situation changed quickly. In fact during the course of last year whole milk powder prices rapidly decreased.

It is true though that New Zealand has heavily focused on milk in the last two decades thanks to a booming demand from emerging markets, particularly China. Today China is working on creating its own dairy industry; in addition, exports to Russia – whose market is extremely interesting – have been cut by international sanctions, and the process for deregulation of Europe’s dairy sector has initiated. All this has led to more than a 50% price drop compared to 2013 (from $5,000/t to $2,013/t).

As a result, bank exposure has increased and bad debts have reached worrying levels. Therefore, the value of land and businesses has also dropped. Last year sales fell by 10% with average sales prices tending to decrease by nearly NZD 4,000.

It will be difficult and complicated for the country to recover, especially as it has concentrated entirely on commodities and lacks real dairy specialities that could diversify its offer on the market, for example China’s market which is increasingly mature and attentive. A solution may be able to be found in its enormous sheep sector which is underused in the dairy sector today.