Key elements of success and failure in the NZ dairy industry

Abstract

This study is one of four studies of New Zealand agribusiness success. In 2006 and 2007, The Agribusiness Research and Education Network researched the success of the New Zealand dairy, kiwifruit, sheepmeat and venison industries. These studies are all business history studies focusing on issues of industry strategy, structure, conduct and performance as perceived by industry participants and the AREN research team. New Zealand is a major player in world dairy markets. New Zealand exports six categories of dairy products: Milk and cream (not concentrated); Milk and cream (concentrated); Buttermilk and related products; Whey and related products; Butter and related products; and Cheese and curd. Concentrated milk (particularly whole milk powder and skim milk powder is the largest product category. Cheese and curd is currently the second most important product category having taken over from butter which has declined in relative importance but remains the third most important category. Non-concentrated milk, buttermilk and whey products are smaller categories but whey products have increased in importance in recent years. The business context for dairy industry participants has been characterised by significant change over the last three decades. Contextual changes have been significant. European and North American subsidies have distorted markets for much of the period. Low cost producers have emerged in China and Latin America. Dairying has had to respond to animal welfare, and environmental challenges. Industry structure has evolved considerably over the last three decades. Structural change has occurred throughout the dairy industry. A key change was the Dairy Industry Restructuring Act 2003 associated with the dissolution of the NZ Dairy Board, the establishment of Fonterra and the removal of statutory monopoly power. The Act was proceeded by a long period of industry concentration and has been followed by industry evolution at a fast pace. Industry conduct and performance have evolved in response to legislative change, business opportunities and business capabilities. Key developments within the industry have included: enhanced farm productivity, uptake of labour saving technologies, the use of nitrogen fertiliser and supplementary feeds, and ongoing adaptation to new technologies and larger farm size. Interviews with industry participants identified eight key success factors. The eight critical success factors identified were: development of international markets; effective political support in international markets; effective political support within New Zealand; effective evolution of industry structure; farmer engagement in policy, strategy, structure and operations; continuing technological advance; maintaining disease free status; and the development of economies of scale. The dairy industry continues to evolve and faces numerous challenges. Key challenges identified by industry participants were: increasing animal welfare demands; enhancing animal health; meeting environmental challenges; managing intergenerational transfers; achieving appropriate research investment in pastures; achieving sustainable and efficient industry structures; and sustaining effective international marketing strategies.