ASEAN: The region that could fill New Zealand's dairy demand void amid China downturn

Farmers were given a glimmer of hope this week as dairy prices rose for the first time since May, amid an economic downturn in China, New Zealand's largest trading partner.  

The dwindling dairy demand from China is adding more financial pressure to farmers like Don and Kirsten Watson, who've run a farm in South Head - an hour from central Auckland - for the past six years. 

"It's been a really expensive start to the year," Don told Newshub. "We came off the back of some cyclone damage." 

Flooding from Cyclone Gabrielle cost the couple about $50,000 overnight. They're now taking another financial hit from the fall in dairy prices. 

"Of the $1.25 that's come off in the last month or so, that's equivalent to $140,000 for us of taxable income," Don explained.  

The average price for whole milk powder may have risen 5.3 percent this week, but that came after prices slumped by 18 percent in August, thanks to lacklustre demand from China. 

New Zealand supplies more than half the dairy products that China imports from the world. But Westpac's latest economic update says underwhelming Chinese dairy demand is expected to continue to put downward pressure on prices until at least late next year. 

That's because China's economy is in deflation, which is partly driven by the country's declining birth rate, but also its approach to COVID-19, as ANZ Agriculture Economist Susan Kilsby explained to Newshub.  

"They had lockdowns and there was not any compensation through that period, so what we're seeing is the opposite happening in their economy in that everything is slowing down, rather than seeing this bubble of inflation we're seeing in other parts of the world." 

Dr Haiping Zhang, a senior economics lecturer at Auckland University, said people in China are more cautious right now about their economic prospects.  

"Therefore, the consumption demand hasn't recovered as people believed." 

But while Chinese dairy demand is slowing, Dr Zhang says China could be unseated from the top export spot, as the ASEAN market grows - that's countries like Indonesia and Vietnam, that form the Association of South East Asian Nations.  

"That could create more income and could potentially create more demand for New Zealand products," Dr Zhang told Newshub.  

Don and Kirsten remain optimistic about dairy farming.  

"Downturns make you a better farmer," Don said. "You find ways to be more profitable." 

And that will help the next generation of farmers continue the tradition of dairy farming, that's become a quintessentially Kiwi way of life.