Fonterra’s exit from Australia ‘a major event’
Fonterra’s impending exit from the Australian dairy industry is a major event but the story doesn’t change too much for farmers.
Fonterra's record $10/kgMS milk payout and the $3.2 billion capital return from the sale of its consumer division to Lactalis have created a rare moment of financial strength for New Zealand Dairy farmers.
The question now is, how will they spend this money? History shows that when milk prices surge, production often follows. In 2014, similar record prices led to a rapid rise in milk production and, within a year, global dairy prices collapsed. According to Environment Canterbury, at least four new dairy conversion consents have been granted this year; modest numbers, but enough to signal renewed interest in expansion.
Although New Zealand produces only about 3% of the world's milk, it supplies more than 60% of the traded whole milk powder. Economic modelling has shown that even a small increase in New Zealand dairy exports can lower world prices. If farmers collectively chase higher production, much of the $3.2 billion capital could quickly evaporate.
But the consequences go beyond economics. More milk means more cows, more feed, and potentially more impact on the environment. Higher stocking rates intensify nutrient runoff and may raise nitrogen and phosphorus levels in waterways that are already under strain.
Many catchments from Canterbury to Southland and parts of Waikato are close to or beyond their nutrient limits. Water quality is improving in some regions, but only slowly, and further intensification risks that progress.
More production also means more greenhouse gases. Methane from livestock accounts for nearly half of New Zealand's total emissions. Each extra cow adds to the challenge of meeting the country's emissions targets. New technologies such as methane-reducing feed additives show promise, but they're still years away from widespread use in New Zealand's pasture-based systems.
Rather than focusing on production, farmers now have a chance to use this windfall to build long-term financial, operational, and environmental resilience. Firstly, paying down debt is the most reliable investment delivering an immediate, risk-free return while reducing pressure when milk prices inevitably fall.
Efficiency is the next opportunity. Smarter irrigation systems, virtual fencing, and digital tools that track cow production, soil moisture and pasture growth can lift profitability while reducing environmental impact. Many of these investments pay back within a few seasons and can help farmers stay ahead of environmental regulations.
The third opportunity lies in improving environmental performance. Upgrading effluent systems, expanding riparian planting, and fencing waterways all reduce nutrient losses and support dairy social licence to operate. Growing more diverse pasture species can lower methane and nitrogen losses while improving animal health and feed quality.
This payout gives the dairy industry the resources to take a step back, not a step up in volume. Expanding production may deliver short-term gains, but the longer-term benefits will come from stronger balance sheets, cleaner waterways, and lower emissions.
Dr Nic Lees is a senior lecturer in agribusiness management at Lincoln University. His research focuses on improving the competitive advantage, sustainability, and resilience of agri-food supply chains.
