Recently TDB prepared a working paper for Goodman Fielder examining the key characteristics of the New Zealand dairy industry.

With dairy production approximately 30 times domestic consumption, the industry is predominantly export-focused, with over 95% of production exported.

Being a pasture-based farming system, New Zealand has a highly seasonal milk curve, with milk production in June and July only around 10% of the October peak. This seasonality has important implications for processing efficiency and competition in the domestic market.

Independent processors with their own milk supply typically require large-scale processing plants to compete internationally and at the farm gate. Export-focused processors can pass commodity price risk back to farmers, making them relatively low-risk businesses. In contrast, participants in the domestic market face greater risks, including the need to supply fresh milk throughout the year.

To meet year-round domestic demand, processors offer premiums to incentivise the more costly production of winter milk. This results in surplus milk production in other periods of the year that must be exported.

The implications of these features of New Zealand’s diary markets – the seasonal milk curve, New Zealand’s comparative cost advantage, Fonterra’s dominant position in the milk supply market and the continuing absence of a factory gate milk market – when designing public policy for the sector will be discussed in subsequent papers.