The dairy industry is well positioned to navigate the twin megatrends of dairy sustainability and geopolitical volatility thanks to its grass-fed, outdoor farming model and history of selling its product in tough market conditions.
This is underpinned by a positive long-term outlook for dairy, Fonterra director of global sustainability and stakeholder affairs Simon Tucker told farming leaders at an open day held by dairy farming group Southern Pastures in South Waikato.
That outlook is largely thanks to rising population and middle-class growth, leading to a strong, steady demand for dairy.
And that, in turn, “underpins healthy pricing”.
Geopolitically, the world has been increasingly unstable since around 2016 and it is in this environment that the industry has had to operate.
On the positive side, Fonterra is used to these tough conditions and has prospered.
“For years we have dealt with other countries subsidising their milk production and dumping it onto the world market if they couldn’t consume it domestically, 300% tariffs in Canada, 200% tariffs in Japan – these big taxes that make it virtually impossible to access these high-value markets.”
New Zealand’s free trade agreements give it an advantage in market access as well as assurance in the volatile geopolitical world, he said.
On the dairy supply side, while there will be global growth, it will not keep up with demand.
Production from traditional dairy producers, including Europe, faces challenges with farmers having to deal with new rules around nitrates and climate change mitigation.
The United States is expanding its dairy production and some of that could find its way onto the global market, but it, too, is facing challenges around competing land usage.
He said India is going to grow significantly but will struggle to keep up with growing consumption.
That country now has the world’s largest population – and they are world’s largest consumers of dairy.
“The interesting thing is how long they can remain self-sufficient. Our hypothesis is that … eventually they will have to start importing more.”
For the industry as a whole, it means good solid, demand and some constraints on supply – which translate into confidence around the dairy price and the returns the industry should receive.
Along with the volatile market, global sustainability in dairy is here to stay. It is no longer a trend but a fundamental part of the dairy market, he said.
Countries are now looking more closely at rules, how they feel about importing products with a non-sustainable background and whether they should be allowed market access.
Among consumers, this trend is also unmistakable, not just among wealthy western countries but among consumers in Asia too.
“We need to think really carefully, are countries going to put up barriers if they believe the food they are importing has a higher carbon footprint than the food they are producing domestically.”
Back in NZ, Fonterra is legally required to do a full disclosure of all the risks associated with climate change by next year – from farmers through to customers.
Fonterra’s highest value customers – including Nestlé, Mars and Unilever – have their own emissions reduction targets and in the post-covid world, all that these customers want to talk about is sustainability, he said.
Nestlé, for example, has a goal of reducing its carbon footprint by 50% by 2030.
“They will also be looking to their own suppliers and saying, ‘How can we partner with you to help you get that footprint down?’.
“We have to take this very seriously.”
The co-operative has a real opportunity to be a leader in sustainable dairy farming. This is not just in the carbon space, but also around water quality and animal welfare, he said.
Low-carbon dairy will be a valuable product to sell around the world. If Fonterra’s competitors hit their reduction targets while the co-op’s remain where they are, then by 2030 they could be lower-carbon dairy producers. They also have greater options to reduce carbon faster than outdoor grass-based systems that are hoping for technology to reduce methane.
Barn-fed systems are better for feed additives and methane capture and they could cut the fossil fuel usage in cut-and-carry systems if electrification occurs through the supply chain, he said.