A new report is forecasting the country's dairy production to expand in the 2020/21 season, though uncertainty over export demand will be the biggest risk to prices.
The report, by Fitch Solutions Country Risk and Industry Research, also said environmental regulations and sustainability concerns would likely slow production growth in the long-term, though would also provide an opportunity for dairy farmers to promote high-value, sustainable products.
The predicted improvement for the 2020/21 season comes after the 2019/21 season suffered several disruptions, including drought, the COVID-19 pandemic and Mycoplasma bovis.
The report's authors said they expected production across all dairy products to return to pre-drought levels in terms of year-on-year growth rates, with whole milk powder production expected to grow by 3 percent this season. Butter and cheese production were expected to have growth rates of 1.6 percent and 2 percent respectively, and liquid milk production was expected to grow by 1.7 percent year-on-year, the report said.
"China remains New Zealand’s top export market for dairy, and we forecast liquid milk consumption in China to increase at 3.0 percent year-on-year in 2021, with continued growth of 2.0 percent thereafter, benefiting the New Zealand dairy export market," the report's author wrote.
"This growth has been influenced by the promotion of dairy milk to consumers to strengthen the immune system in response to COVID-19 in China."
Although demand for New Zealand dairy exports had started to recover following the outbreak of the COVID-19 pandemic "demand risks remain", the report said.
"We note that demand for New Zealand dairy products will take some time to fully recover to pre-COVID-19 levels due to the impact of the pandemic on economic growth in 2020 and to the muted pick-up in consumer spending so far."
The report predicted butter and cheese exports would be the most affected, due to the fact demand for them comes largely from the foodservice and hospitality industries.
"Even as global economies have mostly re-opened and economic activity has picked up strongly starting in Q320, consumer spending on restaurants has lagged behind this recovery due to consumers' concerns.
"This poses risks for New Zealand butter and cheese export demand and prices in 2021."