New Zealand’s Milk Production Drops in the 2023/24 Season Due to the El Niño Impact, Declining Dairy Herd, and On-Farm Inflation

According to data from the Dairy Companies Association of New Zealand (DCANZ), milk production in New Zealand reached 20.22 million metric tons (mmt) in the first 11 months of the 2023/24 season, which began in Jun-23. With one month remaining, Tridge expects New Zealand’s 2023/24 milk production to total around 21.12 mmt. This represents a 0.8% decrease compared to the 21.29 mmt recorded in the 2022/23 season and a 2.13% decline from the five-year average of 21.58 mmt. The anticipated reduction in milk production is attributed to factors such as the impact of El Niño weather patterns, a shrinking dairy cow herd, and on-farm inflation.

Given the pastoral nature of New Zealand's dairy sector, milk output is heavily influenced by climate and pasture production, indicating that the recent El Niño weather had significant impacts on the industry. According to the National Institute of Water and Atmospheric Research (NIWA), El Niño conditions typically bring stronger or more frequent westerly winds during the summer in New Zealand, causing dryness in eastern areas and increased rainfall in the west. This climatic shift likely hindered pasture growth, contributing to the expected drop in milk production for the 2023/24 season.

The effects of El Niño will likely continue to impact the coming 2024/25 season as New Zealand experienced a dry autumn, which is expected to affect pasture and feed availability during winter. This situation is anticipated to influence spring milk production, a critical phase that accounts for 60% of the annual milk output.

The continuous drop in New Zealand’s milk production since the 2020/21 season has been sustained by the persistent shrinkage of dairy cows in the country. According to the New Zealand Dairy Statistics 2022/23 report by DairyNZ, an organization dedicated to supporting dairy farmers, the total dairy cow population was 4.67 million heads in the 2022/23 season, a 3.51% decline compared to 4.82 million heads in 2021/22, continuing a drop since 2017/18 and the lowest since 2011/12. This persistent decline in the dairy cow population is primarily attributed to changes in land-use to horticulture and property developments.

Figure 1: New Zealand’s Dairy Cow Population and Productivity Trend

The report also notes that the total effective dairy farming area was 1.66 million hectares in the 2022/23 season, a 2.35% year-on-year (YoY) drop, continuing the shrinkage trend since 2017/18. Despite the reduction in cow numbers, the average production per cow increased to 4,428.1 kilograms (kg) in 2022/23, a 3.32% YoY rise. This increase in per-cow productivity has helped cushion the declining herd’s impact on New Zealand's overall milk production.

The anticipated drop in milk production for the 2023/24 season is also linked to high on-farm inflation, driven by elevated interest rates on debt servicing and increased farm input costs. According to the United States Department of Agriculture (USDA), New Zealand dairy farmers expect that interest on farm debt to continue to be a significant challenge, as it now comprises nearly 19% of the breakeven milk price per kg of milk solids. This is a marked increase from two years prior, when on-farm debt accounted for just 10% of the breakeven cost.

The Reserve Bank of New Zealand (RBNZ) also reports that loans to dairy farmers have stabilized at USD 21.9 billion in recent years, with 54% of these loans classified as interest-only, 30% as revolving credit, and 16% as principal and interest. This financial structure, combined with the impact of the rising official cash rate (OCR) over the past two years, has further strained the dairy sector.

Moreover, New Zealand has faced challenges with farm input prices, particularly for feeds and fertilizers, which have squeezed profit margins amid reduced milk rates. It is worth noting that feed and fertilizers constitute nearly 33% of the costs for New Zealand dairy farms. Although feed prices have eased moderately since 2023, they are not expected to return to pre-COVID-19 levels, posing ongoing challenges for dairy farmers. Furthermore, the USDA reports that geopolitical tensions in the Red Sea and low water levels in Gatun Lake in the Panama Canal have extended shipping times of farm inputs to and from New Zealand by an extra two weeks. This disruption has kept the prices of feeds and fertilizers elevated, further straining the dairy industry.

Looking ahead, New Zealand’s milk production is expected to continue declining in the 2024/25 season due to decreasing dairy cow numbers and high on-farm inflation, although slower than in 2023/24. Amid these production challenges, New Zealand milk processors are anticipated to continue shifting their processing capabilities from milk drying to producing more fresh products such as butter, cheese, and cream, as well as specialty products like infant formula and protein concentrates. This strategic shift is driven by the greater export opportunities these products present, which dairy processors aim to capitalize on.