The ongoing dairy market depression is an uneven one, with Australian and European export volumes actually rising over this time. On the other hand, while America had the biggest percent drop in exports, the most painful market adjustments were made by New Zealand. While Kiwi dairy exports of WMP, SMP, butter and cheese only fell 5.8% compared to more than 10% for America, both on a volume and value basis, the decline shipments hurt New Zealand's dairy farms far more.

 

America's large, stable market absorbed over 85% of its output, stable prices at home kept profits relatively stable and domestic demand growth easily substituted itself for lower export volumes. In New Zealand's case, 90% of its production is exported. Moreover, in a line like WMP, which dominates its world market presence, New Zealand exports nearly 99% of its output. Exposed to the full volatility of crashing world dairy prices with no compensatory rise in either exports or domestic consumption, it has borne the brunt of the declining dairy market's adjustments in the form of sharply lower returns.

 

Exposed to the full force of the world market's price declines, no exporter has seen it domestic milk prices fall as sharply. Fonterra, its largest dairy exporter, cut its farmgate price for milk solids from over NZ$7.00/kg in early 2014 to NZ$3.85/kg in the first half of 2015 and an estimated NZ$4.60/kg for the June 2015 to May 2016 marketing year.

 

Coinciding with a period of high beef cattle prices, this has motivated many farmers to cull their herds, thereby bringing down both dairy cattle inventories and production. From 5.2 million head a year ago, dairy cattle number are projected to fall by 1.9% or 100,000 head to 5.1 million by mid-year.

 

To make the most of thinner profit margins, farmers are cutting back on supplementary feed, thereby causing cow productivity to fall. To this can be added the Q4 2015 southern hemisphere spring, which in New Zealand's case was unusually cool. This constrained pastureland growth and further restrained dairy cow productivity.

 

From its 2014 peak of 21.89 million tonnes, fluid milk fell by a USDA estimated 2.2% in 2015 to 21.4 million tonnes and will fall another 3% this year, to 20.75 million tonnes. Production across all dairy goods is thus also declining for a second straight year. From its peak of 3.05 tonnes in 2014, production across all dairy goods fell 4% to 2.93 million tonnes in 2015 and is projected to decline a further 3% to 2.86 million tonnes in 2016.

 

Although domestic consumption and exports across all dairy goods will amount to nearly 3.3 million tonnes, it will take several years of inventory rundowns, both in New Zealand and its export rivals before supply can be balanced with demand. With consumption and exports now exceeding fluid milk output, combined inventories of WMP, SMP, butter and cheese are forecast to fall by 25,000 tonnes or 6%, from 2015's 415,000 tonnes to 390,000 tonnes by the end of this year.

 

With WMP being both New Zealand's primary dairy export and faltering China its largest customer, 2015 saw exports of this powder fall 4.4%, from 1.423 million tonnes in 2014 to 1.36 million tonnes in 2015 and are expected to remain unchanged this year. Moreover, China's turning against the world dairy market is also beginning to impact New Zealand's dairy commodity mix. For while all its dairy export lines fell by around 5%, some saw their world market price fall by far more than others.

 

WMP may account for close to half of New Zealand dairy exports but after two years of it selling 45% to 70% below early peak 2014 price, its production fell 5.8% last year, and is expected remain flat at 1.375 million tonnes in 2016. On the other hand, cheese production jumped 7%, from 310,000 tonnes in 2014 to 347,000 tonnes last year.

 

This reflects how returns on fattier products have fallen by less than those on milk powders. For example, despite triggering the dairy market downturn, China's imports of New Zealand cheese continue to rise, from a USDA estimated 21,000 tonnes in 2013 to approximately 45,000 tonnes this year.

 

Moreover, with a $500/tonne gap between cheese and WMP prices persisting, it is likely that cheese output will not fall back to 2014 levels as predicted by the USDA but stay at its 2015 volume of 347,000 tonnes. With producers eager to take advantage of its relatively higher returns, exports are poised to stay at their 2015 record levels, instead of falling as initially expected.

 

Similarly, with butter prices having fallen significantly less than SMP, New Zealand will run down inventories to keep exports of this fatty dairy line unchanged at 560,000 tonnes, the same volume as before the dairy market crash.

 

There is also good news over the medium. Even WMP, its most battered dairy line, managed to counterbalance a 250,000 tonne drop in shipments to China by boosting its exports to the rest of the world by 200,000 tonnes. This implies that once the market recovers, it could broaden its export base and become less singularly dependent on China than it currently is.

 

On the supply-side, even if returns do not change much, with last year's El Nino fading, meteorologists are forecasting that a rain-bringing La Nina is due to occur in the second half of this year. This should restore pastureland in time for the start of its 2016-17 marketing year, enabling the production of milk and dairy products to end this year on a strong note.

 

Over the longer term however, the country does face one pressing long-term challenge: With the EU seeking Asian outlets for its surplus dairy goods, New Zealand's dairy products, like those of Australia, face intensified competition, particularly in Southeast Asia.

 

For while the New Zealand dollar has fallen 22% against the US dollar in two years, its value has not changed much against the Euro, whose exchange rate is expected to decline in the latter part of this year. This is unfortunate, as New Zealand's exports, in addition to taking the brunt of China's falling demand, also have the most to lose by the EU's increasingly strong presence in Asian dairy markets. With the US dollar also showing signs of cheapening, some markets may see New Zealand dairy products being squeezed out by the US and European competition in years to come.