There are many reasons for continued dairy conversions and more intensive dairy farming.

The first reason is the rise in the international price of milk. This happened partly because of an increase in demand from developing countries like China, but also because the EU stopped subsidising their exports. So demand increased, and supply fell simultaneously in the international market.

The world price is now set by the cost of intensive dairy farming (cows are kept in sheds, fed on grain). So unless the price of grain goes up we probably won’t see the world milk price rise as quickly as it has in the recent past. Could it fall? Who knows – it all depends on whether the developing world can increase their own production to keep up with demand.

The New Zealand farming model has traditionally been based on lower cost grass-fed animals – the cows walk to the pastures and eat the grass as opposed to the meals-on-wheels approach in Europe (the feed is brought to the shed).

Higher prices have encouraged NZ farmers to produce more milk, and they have done that through converting more land to dairying, or getting more milk out of the land already in use, by irrigation, more fertilizer, importing feed and sending non-milking stock to be grazed elsewhere.

This increases production, but it increases costs too, so the impact on profit isn’t clear. What is clear is that when the true costs are taken into account – such as the cost of the water used and the impact on water quality from more cows, profitability is lower. Up until now we haven’t been taking the full costs into account. Ironically, when investigating the economic impact of water quality changes, the Ministry for Environment only looked at the impact on farm incomes, rather than the benefits of having better water quality.

In a few areas the increase in dairy cow numbers and the consequent demand for water exceeds natural limits – the water resource is over-allocated or polluted. This should alarm everyone, including farmers, because the obvious consequence is a reduction in water to allocate.

The shift to dairying isn’t helped by all farmers being paid the same price for their milk regardless of where it is produced. Would farming in the McKenzie country be profitable if farmers got paid a price that reflected the cost of picking up their milk?

Finally, our tax regime has not helped either. As milk prices have risen, so have land prices, essentially converting taxable income into tax free capital gains. Sheep and beef farmers are almost compelled to convert, and new dairy farmers have such high debt that they need to farm intensively to pay off their debt to the bank.

This trend has been a major source of wealth for New Zealand in recent years, and we don’t want to kill the goose that lays the golden egg. However there have to be limits. We have to find ways to reduce the risks with our current growth strategy. Otherwise we risk pursuing dumb growth.

If we want to keep increasing milk production we need to adopt less polluting management practices across all farms.

Our Findings – Why Did it Happen? was last modified: August 29th, 2016 by Gareth Morgan