A perfect script for NZ Dairy?

This is one of those times when the season is up and running but there's not much news on the commodity price or milk price front.  The next global dairy trade will be held on the 20th of September and Fonterra announces its final result for 2010/11 on the 22nd.  Good announcements are expected for both.

As farmers it's natural to hope for an ever-escalating milk price.  But we all know that can't last.  High prices lead to extra production which in turn leads to excess commodity supply which results in falling prices.  We saw this 'natural order of economics' in 2002 and in 2008.

The great aspect of the current situation is that high prices are not, in general, resulting in big increases in milk production.  Although US milk production is expected to increase by 1.5% on last year, production intentions are being moderated by very high feed costs.

Whereas feed costs (including off-farm grazing) in NZ are about 25 - 35% of farm costs, in offshore countries feed costs 60 - 75% of farm costs.  These feed costs have been subject to major price escalation with huge demand from Grain and Soya use for human consumption, for corn use for ethanol production and for feed use for animal production.

An old saying is that milk production in the US won't start surging until the milk price is twice the feed cost - and at present that ratio is more like 1.5 to 1.75 times.

So this brings us back to the strength of the NZ dairy industry; our low cost pasture based farming system.  The current milk price gives us very satisfactory returns and yet things are far from overheating overseas.  Nothing is guaranteed but at this stage the dairy boom appears to be sustainable and based on genuine comparative advantage.

Are there any clouds on the horizon?  Well there always are.  Our industry is very dependent on the fortunes of China, South East Asia and India.  But which industry isn't?