Dairy sales have gained strength despite the pandemic but the industry could be undermined by government policy, an NZIER report says.
The report, written by the economic consultancy's principal economist Chris Nixon, said the industry had brushed aside COVID-19 - earning more money, not less - and had defences against a movement towards trade protectionism and dairy substitutes such as almond milk.
It said the dairy industry had proven itself to be a durable part of the New Zealand economy and this would continue for the foreseeable future, but it needed careful attention from the Government to maintain confidence.
Nixon said while many primary sectors rose modestly during COVID-19, or fell, dairy sales were strong.
"New Zealand dairy exports are running $709 million above this time last year in what is a stellar performance, mainly due to strong commodity prices," the report said.
It said this compared with lesser rises in fruit and meat and falls in forestry and seafood.
The report said the Chinese market was especially strong for New Zealand. Even though the government in Beijing had set out to boost dairy production at home, demand was outstripping this increased domestic supply.
Even biological changes were helping.
"Lactose intolerance is becoming less of a problem in Asian consumers," the report said. "Targeting of young consumers means that Asian babies are born with the ability to make lactase, therefore, children do not stop drinking milk as they grow up."
The report also cited the Indian market, saying although trade protectionism there was very high, India would become the world's third largest economy and so could not be ignored.
The NZIER report also forecast resilience to the threat of alternatives to milk.
"Whether plant-based milk is taking market share from bovine milk is unclear, since in Asian markets, at least, milk consumption from livestock is still growing.
"Where plant-based milk is taking market share from livestock milk is in industrialised nations. However, even in these markets, consumers see livestock milk as a natural and healthy product."
It warned about the effects of policy on the industry however.
"With the application of the ETS, the Zero Carbon bill, and freshwater initiatives, dairy farmers' confidence has been knocked.
"An indicator of the lack of confidence has been the low number of farm sales in the sector."
It said the Government had made a start with its Sustainable Food & Fibre Futures, but it needed to develop a realistic understanding of what could be achieved at the level of each individual catchment.
It also needed to be aware of the costs of its policies.
"There is a limit to how much NZers are prepared to pay for cleaner water."