The report, Survive or Thrive—the Future of New Zealand Dairy 2017-2022 by Rabobank, said milk processing plants had invested heavily to expand their capacities between 2013 and 2015 in anticipation of strong milk supply, but now milk production is forecasted to slow to, or below, 2% for the next four years.
In the 2016 dairy companies processed 20.6bn litres of milk, down from 21.253bn in 2015, according to New Zealand Dairy statistics.
Emma Higgins, dairy analyst at Rabobank, said this slow down would have implications for the whole supply chain.
“There is a risk for processors that they may not achieve optimal capacity utilisation going forward, as milk supply slows,” she said.
“We have seen extra capacity come online over the past five years, largely to deal with the wave of milk New Zealand has produced but if we see a slowdown in milk production growth, the risk is that processing plants could be operating at sub-optimal capacity utilisation.”
The second implication would be that processors would need to review their strategies for obtaining new, or maintaining their existing, milk supply.
Higgins said there were at least four options for processors to maintain their milk base—protecting the status quo milk supply, aggressively recruiting for new supply, expanding into new territory or acquiring existing production assets with milk supply attached.
“Regardless of the supply strategy employed, processors will need to deliver more competitive returns to farmers to ensure supply stickiness, either by adding value to their product mix where possible and passing some gains through to farmers, or efficiently producing commodities at low cost,” she said.
The final implication the report found would be greater competition at the farm gate, as milk supply slows and processors look to fill plants.
“We may see new pricing structures emerge and new, innovative products to support farmers to manage cash flow and capital in order to attract and retain milk supply,” Higgins said.
Higgins added that increased competition for milk is most likely to impact Fonterra, Open Country Dairy and Westland, as the most exposed processors to adverse shifts in their existing supply base in relation to their current plant capacity.
The report said farmers in the Waikato, Southland and Canterbury regions would be the most likely to benefit from the increased competition, with three new plants set to be built over the next two years.
Source: CIPS
Link: https://www.cips.org/en/supply-management/news/2017/august/nz-dairy-processors-to-complete-as-milk-supply-slows/
