New Zealand’s dairy farmers are riding a wave of unprecedented prosperity as milk prices hit record highs while production surges. This paradoxical boom defies economic norms, promising a potential windfall for the industry. But what’s driving this golden era of Kiwi dairy, and can it last?

EXECUTIVE SUMMARY: New Zealand’s dairy industry is experiencing an unprecedented confluence of record milk prices and increased production, defying typical economic expectations. Fonterra’s forecast of $9.50-$10.50 per kilogram of milk solids would set a new record, while January production is up 2.6% year-over-year. This dairy boom is driven by global supply constraints, recovering Asian demand, and strategic trade advantages, particularly China’s removal of all tariffs on New Zealand dairy products. While farmers benefit from projected payments of nearly billion over 16 months, consumers face rising retail prices, sparking controversy over potential price-fixing in domestic markets.

KEY TAKEAWAYS:

• Fonterra forecasts a record milk price of $9.50-$10.50/kgMS, with banks projecting between $9.85-$10.25/kgMS for the current season
• January milk production reached 5.3 billion pounds, up 2.6% year-over-year, with milk solids rising 5%
• China’s removal of all tariffs on New Zealand dairy products as of January 1, 2024, provides a significant competitive advantage.
• The weak New Zealand dollar following the US election has further boosted returns for dairy farmers.
• Domestic consumers have seen milk prices rise by 57 cents across major retailers, sparking controversy.
• US dairy exports to Southeast Asia fell 20% in November 2024, while New Zealand capitalized on the market gap.

In the lush green pastures of New Zealand, dairy farmers are experiencing an unprecedented confluence of favorable conditions as milk prices reach record highs while production volumes simultaneously surge. Fonterra, the country’s dominant dairy cooperative, is forecasting a milk price of .50-.50 per kilogram of milk solids (kgMS) for the 2024-25 season, which would shatter the previous record of .30 set in 2021-22. This remarkable price rally comes as January 2025 milk production reached 5.3 billion pounds, up 2.6% year-over-year, with milk solids rising an impressive 5% compared to January 2024. The combination of peak prices and increased output represents a potential windfall for New Zealand’s dairy industry, which forms the backbone of the nation’s export economy.

Record Prices Amid Production Surge: Breaking Economic Expectations

In economic theory, increased supply typically leads to lower prices. Yet New Zealand’s dairy industry defies this fundamental principle, with production and prices hitting record levels simultaneously. This paradox reflects a complex interplay of global supply constraints, recovering Asian demand, and New Zealand’s strategic trade advantages.

January’s impressive 5% increase in milk solids has propelled the season-to-date total to a 3.9% rise versus the same period in 2023-24. This continues a trend seen throughout 2024, with September showing a 4.1% increase in milk output compared to the previous year and milk solids rising by 5.2%. The production boom appears sustainable, with favorable weather conditions supporting pasture growth across most regions of New Zealand.

ASB senior economist Chris Tennent-Brown recently upgraded the bank’s forecast milk price for the current season to $10.25/kgMS, citing strong auction results. “We’ve lifted our forecast for the current season to $10.25/kgMS,” he noted, pointing to a 5% increase in whole milk powder prices that pushed them to their highest average since June 2022. Meanwhile, ANZ has revised its 2024-25 season milk price forecast by 85 cents to $9.85/kgMS.

Fonterra CEO Miles Hurrell confirmed the company’s optimistic outlook in December when he raised the midpoint of the forecast to $10/kgMS. “We’re seeing a recovery of demand in China as domestic milk production rebalances and demand from Southeast Asia stays strong,” Hurrell said. Looking at supply, milk production in the United States and Europe continues to be impacted by local factors, while production in most regions of New Zealand has increased.”

Global Factors Driving the Dairy Boom

Several converging global factors explain why New Zealand’s increased production hasn’t depressed prices. First, production constraints in major dairy regions like the United States and Europe have created favorable supply-demand dynamics globally. U.S. milk production dropped by 0.4% in July, while EU production showed only modest growth.

Second, demand recovery in China, New Zealand’s largest export market, has been significant. After reduced imports, Chinese buyers have returned to replenish depleted inventories. This resurgence in Chinese demand is substantial for whole milk powder (WMP), New Zealand’s largest dairy export category. Prices have surged past $4,000 per metric ton, reaching their highest level since 2022.

Perhaps most significantly, January 1, 2024, marked a pivotal moment for New Zealand’s dairy industry when China removed all remaining tariffs on New Zealand dairy products under their free trade agreement. “Starting January 1, 2024, New Zealand’s dairy products gained duty-free access to China, marking the culmination of strategic tariff removal outlined in the China-New Zealand Free Trade Agreement,” confirmed Chinese trade officials.

The timing couldn’t be better, as Chinese importers have been actively rebuilding inventories of skim milk powder and whole milk powder. This trade advantage has helped New Zealand dairy exports capitalize on growing Asian demand while competitors like the United States face challenges. In November 2024, U.S. dairy exports to Southeast Asia dropped 20% compared to the previous year, primarily due to a steep 43% decrease in nonfat dry milk sales—their lowest level since mid-2019.

Currency Effects Amplify Returns

The weakening New Zealand dollar has further boosted returns for dairy farmers. The U.S. dollar has strengthened since Donald Trump’s victory in the recent U.S. elections, putting downward pressure on the NZD/USD exchange rate.

“The weak NZ dollar is contributing to higher milk prices,” explains Susan Kilsby, an agricultural economist. “Most dairy products are traded in USD terms, so the weak NZD means returns are bolstered in local currency terms. It does mean imported inputs such as machinery, diesel, and fertilizer are more expensive, but overall, farmers tend to be better off when the NZD is weak.”

According to Kilsby, about two-thirds of the milk production for the season has already been sold, which increases the accuracy of final milk price estimates. With the NZD/USD exchange rate currently favorable for exporters, the outlook remains strong for the remainder of the season.

Record Payout Expectations for Farmers

If realized, Fonterra’s forecast milk price of $9.50-$10.50/kgMS would represent an unprecedented windfall for dairy farmers. The cooperative is projected to pay farmers nearly $15 billion over the 16 months from June 2024 to October 2025—the most significant annual financial expenditure in its 24-year history.

Further bolstering farmer returns, Fonterra announced in February 2025 that it anticipates earnings in the upper half of its previously forecast range of 40-60 cents per share. CEO Miles Hurrell noted, “Considering these factors, we expect to be able to pay a strong interim dividend. Our revised dividend policy released in September 2024 is 60-80% of full-year earnings, with up to 50% of full-year dividends to be paid at interims.”

This front-loaded payment approach represents a shift in Fonterra’s financial management strategy, which aims to provide earlier returns to farmers to improve their cash flow. In mid-January 2025, Fonterra made its largest-ever monthly payment to farmers for milk solids, combining an 85% advance rate on December’s production with catch-up payments for June to November production.

Consumer Impact: Rising Retail Prices Spark Controversy

While the dairy boom has been a boon for farmers, New Zealand consumers have felt the pinch of rising retail prices. In early 2025, major supermarkets increased milk prices by precisely 57 cents, sparking public debate about potential price-fixing.

“Woolworths went from $6.18 yesterday to $6.75, Pak’n’Save went from $6.12 yesterday to $6.69, and New World had the same jump to $6.81. An exactly 57-cent price increase,” noted one concerned consumer. “I’ve never witnessed such a significant single-day price increase before.”

Industry insiders explain that the substantially increased international milk price influences retail prices. “Milk prices follow a simple model. The milk price is known to everyone as the DIRA price,” explained one commenter. Milk prices are reevaluated every quarter and converted to a simple formula. There’s a direct correlation between the DIRA price and what consumers pay.”

Others pointed out that New Zealand exports most of its milk, influencing domestic prices. “Given that we export most milk, they probably increased local prices to be in line with what they make from exports,” suggested another observer.

The price disparity between supermarkets and other retailers has further fueled the controversy. For instance, Costco was reportedly selling 3L bottles of milk for around $5.48, significantly less than major supermarkets.

Strategic Advantage in Global Markets

Recent trade developments have strengthened New Zealand’s competitive position in global dairy markets. As of January 1, 2024, the complete removal of Chinese tariffs on New Zealand dairy products is expected to deliver additional annual savings of approximately NZ$350 million (US$221 million) for New Zealand exporters.

This trade advantage is critical when U.S. dairy exports to Southeast Asia are faltering. In November 2024, they dropped by 20% compared to the previous year, primarily due to pricing challenges. Since July, the price of nonfat dry milk in the U.S. has been higher than in Europe and Oceania, making New Zealand’s products more competitive.

The importance of export markets for New Zealand’s dairy industry cannot be overstated. Approximately 95% of all dairy milk produced in the country is exported as milk or dairy products, generating annual export revenues of around NZ$19.1 billion. This export orientation means New Zealand’s dairy sector is uniquely positioned to capitalize on growing global demand.

Fonterra’s Strategic Shift

Fonterra, which handles more than 90% of New Zealand’s milk production, has undergone a strategic transformation that may further enhance farmers’ returns. The cooperative has focused on high-margin B2B segments such as food service and ingredients while divesting some global consumer brands.

“For Fonterra, this pricing approach is more than simply good fortune. It demonstrates a robust and strategic emphasis on their B2B areas, such as food service and ingredients. By focusing on these high-margin sectors and divesting some of its worldwide consumer brands, Fonterra hopes to improve its financial health and provide even higher returns to its members.”

This strategic shift reflects Fonterra’s adaptation to changing global market conditions and its focus on maximizing returns for its farmer-shareholders. By concentrating on areas where it has competitive advantages, the cooperative aims to sustain high payouts even as global dairy markets evolve.

Challenges on the Horizon

Despite the favorable conditions, New Zealand’s dairy industry faces several challenges that may impact its long-term trajectory. Environmental regulations represent a significant concern as the industry works to address its ecological footprint, particularly regarding water quality and greenhouse gas emissions.

Weather conditions also remain a wild card. “A lot of regions could do with a drink, as NIWA’s soil moisture deficit charts have been showing,” noted Tennent-Brown. “There are still a lot of products to sell and the usual uncertainty about how strong production growth can be over the months ahead.”

Longer-term challenges include emerging food technologies, such as alternative protein sources and synthetic dairy products, which could eventually compete with traditional dairy. While these technologies are still developing, they represent a potential disruptive force for New Zealand’s export-oriented dairy model.

Outlook for the Remainder of the Season

The outlook remains optimistic but cautious, with about four months in the current season. “Although the peak production period is behind us, many moving parts can still influence the milk price,” says Tennent-Brown .

Production over the season is up 3.7% compared to the same period a year earlier, but the coming months typically account for over one-third of the overall volume. Weather conditions and global market developments will continue to be closely monitored.

New Zealand dairy farmers are enjoying what might be considered a golden era, with record milk prices coinciding with production growth. Fonterra’s unprecedented $9.50-$10.50 per kilogram milk solids forecast and increased production volumes suggest dairy farmers will see exceptional returns in 2025.

As one industry observer put it: “The 2024-25 season is shaping up to be a cracker.'”[18]

LEARN MORE:

• New Zealand Milk Prices Soar Amid Global Production Shifts
• New Zealand Milk Payout Soars: Record Cheese and Butter Profits
• How U.S. Dairy Exports to Southeast Asia Dropped 20%

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