The international dairy market

KPMG’s Global Head of Agribusiness, Ian Proudfoot, speaks with Lorcan Roche Kelly, Agri-business editor with the Irish Farmers Journal, on the evolving international dairy market.

It’s impossible to talk about the outlook for the dairy industry globally, without talking about the outlook for China. Being based in New Zealand, Ian Proudfoot has a ringside seat for the industry developments that matter.

“China is going through a period of transition – there was a long period where they would pay a premium for product,” Proudfoot said, warning that “what we are seeing post-pandemic is that consumers are being very conservative about how they are spending their money, so demand hasn’t built back as quickly as we might have expected.” He estimates that the very long period of strong Chinese growth is over and that the country is now a more mature economy.

“What was an 8%-10% growth market is now a 2%-4% growth market. It will still be a big player in global markets, but they will try to do more and more internally. We are seeing that internalisation in infant formula, very clearly, and that’s been accompanied by the Chinese brands becoming more acceptable to consumers.”

Closure of Wyeth

The recent announcement of the closure of the Wyeth facility in Co Limerick clearly illustrates the changing market in China. However, as Bord Bia data shows, Ireland has been very successful in replacing the lost value in infant formula exports with other dairy products meaning that value of exports to China from Ireland has changed little over the past five years.

Five years ago, infant formula accounted for more than 75% of Irish dairy exports to China. In the year ended in August 2023 it accounted for just 60% while the overall value of exports to China over the five-year period dropped less than 2%.

“For the opportunities in the Chinese market, you can see that it probably lies in the growing population of people who are ageing, who may be looking for solutions or formulas which help bone nutrition and density and those kinds of grown-up products. They will still be a very important player in the global market, but I think there will be other countries which will become more important than they have been.”

He notes the work that China has done to produce more domestic milk, and the ambitions the country has to increase its milk pool. He also has a word of caution on the outlook for demand among the ageing population.

“There is an idea that as the Chinese age they will spend more money on themselves. That’s not necessarily a trend we see strongly in China, so it may be that as people age they will continue to rely more on traditional remedies than on newer products.”

"We’re getting a better idea of where milk supply from New Zealand is going to be for the season, and it seems quite likely that flow will be down 1%-2%. However, as I said, it is early days, but there may be a bit of concern over where supply will be available over the coming months.”

The cost of labour has fundamentally changed in the global food system...it’s harder to get people and the people you can get are more expensive. I think that is a permanent cost increase.

Ian Proudfoot

Global Head of Agribusiness

KPMG in New Zealand

Costs

The issue of rising costs has been one of the major factors influencing the industry in recent years. Proudfoot sees the price of fuel and fertiliser eventually reverting to their long-term historical averages. However, there are two other costs of doing business that he is much more concerned about.

“The cost of labour has fundamentally changed in the global food system, both for primary producers and processors,” he explains, “it’s harder to get people and the people you can get are more expensive. I think that is a permanent cost increase."

“Another key cost in New Zealand is the cost of money for farmers, particularly in the dairy sector where they have invested heavily in capital, invested to buy the land and as a result they are carrying large levels of debt. As we’ve gone from cheap and almost free money, to where we are now with interest rates at 7%-9%, that is a significant cost base increase for these farming businesses.”

He does note that the rapidly rising interest costs do not fall evenly across the sector as many farmers have reduced debt levels. It is those who mistimed their investments that will face the more severe burden from higher rates.

New Zealand politics

When we spoke to Proudfoot, it was in the weeks following the New Zealand general election which had seen a huge swing from the ruling Labour party towards more centre-right and right-wing parties.

“The results for every rural constituency show a swing to National Party, the large centre-right party in New Zealand. What has driven that? Well, when we did our work around the Agribusiness Agenda we prepared for New Zealand, and we did that in March and April of this year, there was a real inherent anxiousness about where the industry is going,” he said.

“That was anxiousness about known regulation, but equally anxiousness about legislation that people believed to be coming. So whether that is about the carbon rules, or fresh water rules, or nutrient run-off rules, or winter grazing rules, there’s just a whole heap of different rules.”

Proudfoot noted that Rabobank’s quarterly farmer confidence survey taken a couple of weeks before the election showed that confidence was at pretty much its lowest level ever. He said this was “because of all the uncertainty that existed”. The centre-right partners had taken advantage of this and talked about doing a lot to reduce red tape on farming businesses, which appealed to the rural voter. There was also a very significant swing in the city of Auckland.

“This was a reaction to the very long lockdown we had between August and December 2021,” said Proudfoot. “The government never recovered the confidence of the people of Auckland in the wake of that one.”

Of the promises the incoming parties have made, one of the major ones is the pushing back of the timetable for carbon charging mechanisms. Colloquially known as the ‘fart tax’, pushing it back will allow room to restart a process which would see a partnership of industry, government and farmers work together to produce a set of rules which would enable the sector to meet the legislative requirements for decarbonising the economy, Proudfoot explained.

Government is an enabler, it’s not the doer so it actually comes down to individuals recognising and being able to stand up and lead the industry forward.

Ian Proudfoot

Global Head of Agribusiness

KPMG in New Zealand

Decarbonising

“We need to have some mechanisms to enable measurement of the carbon being sequestered into a farming system and then a process to enable that to be monetised for the farmer. The goal would be to have a more equitable system that’s balanced and in place by 2030.”

The current targets for decarbonising the economy are enshrined in law, so they will not be changed, so the effort will still have to go into achieving those targets. Proudfoot suggests that the worst of the uncertainty may be behind New Zealand farmers with the coming change in government.

“I would say we are now in a position where confidence will be coming back and that we will see a regulatory environment that is more cognisant of the impacts that it has on the economic drivers of New Zealand, and therefore ensuring that our farmers are able to farm commercially.“

"In the end though, government is an enabler, it’s not the doer so it actually comes down to individuals recognising and being able to stand up and lead the industry forward."

"We need people that can articulate a vision for the sector. That vision has to be for a lower carbon future, one where are instilling as many attributes into our product around sustainability.”

This article originally appeared in the Irish Farmers Journal and is replicated here with their kind permission.

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