April 25, 2014

Prem Maan
Managing Director & Chief Executive Officer, Southern Pastures New Zealand

Dairy as an agricultural investment sweet spot

Dairy occupies a unique positioning within the protein story. It is a versatile product that can be turned into many different products. In its powdered form it has a long shelf life and can be transported and consumed at room temperatures. It is the only acceptable animal protein source for India’s primarily vegetarian population and is certifiable as Halal for Muslim markets. Infants can consume milk thereby providing protein during the critical development phase as they progress from mothers’ milk to solids. Dairy products are easily consumed by and fortified for the elderly for their protein, calcium and vitamin needs.

Global dairy consumption is expected to increase by 2% per annum; production is expected to increase by 1.8% per annum. The impact that this will have on the global dairy cross border trade is far more powerful than what the deficit number may initially suggest. The deficits exist primarily in markets that are already short of product and where demand is rising fastest due to rising incomes such as China, India, ASEAN (and Indonesia in particular) and the Middle East. Such markets will have to turn to the global dairy trade to try to satisfy the domestic demand.

New Zealand has a 37% market share of the global dairy trade; it is twice as important to the global dairy trade as Saudi Arabia is to oil.

New Zealand’s production has been built on its fortunate geographical positioning that provides it with a temperate climate blessed with rich water resources. Lacking subsidies and consuming only 3% of the country’s milk production New Zealand has been forced to seek export markets and free trade agreements. New Zealand now exports dairy products to over 150 countries and accounts for around 90% of China’s imported dairy products.

New Zealand dairy industry structure, the bulk of the country’s milk production is sold to farmer owned cooperatives, provides unique advantages. It ensures that global dairy prices are transmitted in a timely and transparent manner to farmers whilst providing a greater part of the dairy value chain as the cooperatives profits are distributed back to shareholding farmers. In the current season when milk payments to farmers in other exporting countries such as Australia, US and Europe has increased by 25%, New Zealand farmers have enjoyed a 40% increase (and from a higher base).

Dairy protein is not generic. It matters how the cows are treated and what they are fed. In particular, grass-fed cows produce milk that is high in Omega 3 and CLAs. A study undertaken by Harvard showed that even people who smoked plus had high blood pressure reduced their risk of having heart related issues if they consumed grass-fed milk.

New Zealand dairy industry is based on grass-fed milk and sells at a premium to milk from other countries that rely on non-forage feed such as grains for milk production. Hormones are not used and any cow given antibiotics is excluded from milking. New Zealand dairy also has a low carbon footprint (products are delivered to UK consumers at less than half the carbon footprint of local products).

The global dairy shortfall means that the world effectively needs another New Zealand to come on-stream within the next decade. However milk such as what is produced in New Zealand will remain a premium product, as there isn’t sufficient forage land in the world to meet the demand.

The volatility of milk prices is expected to remain high as movements in global supply has a material impact. The volatility is due to factors such as climatic conditions in India, USA, NZ, Australia and Europe and feed costs. In this latter respect New Zealand is well insulated – a pastoral dairy farm locks in the bulk of future feed costs. New Zealand continues producing when other key producers are culling cows due to high feed costs.

The global supply and demand economics means that milk prices, inter and intra seasonal volatility notwithstanding, should continue to appreciate. New Zealand enjoys the benefits of producing a premium product, a material market share, and the ability to withstand high feed prices.

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Prem Maan was a member of the speaking faculty at Global AgInvesting 2014 at the Waldorf Astoria New York City, April 28-May 1.

The opinions expressed in this editorial are the author's own and do not reflect the view of Global AgInvesting.