New Zealand’s top diplomat says his Indian counterpart suggested getting dairy into any free trade agreement with India is highly unlikely – but the New Zealand team remains committed to trying.
Ministry of Foreign Affairs and Trade (MFAT) deputy trade and economic secretary Vangelis Vitalis was addressing an audience at the Waikato Farmers Forum this week, when he made the comments about the current efforts by New Zealand to agree a free trade agreement with India.
It was the Government’s “top priority” now, after India had finalised trade deals with Australia, the United Arab Emirates, the UK, Iceland, Liechtenstein, Norway and Switzerland recently.
But “in none of those agreements did India make any commitments on dairy”, he said.
“India has never opened its market up for dairy, and to quote my [Indian] counterpart, ‘If we’re ever going to open up for dairy, it’ll never be for New Zealand’.”
Indian dairy did see New Zealand production as a competitive threat, which created a new dilemma in cracking the multibillion-dollar market.
Vitalis is leading the trade negotiations with India and will travel to Delhi this week as talks continue: “That is going to be a really big task: how do you get access for New Zealand dairy into this colossal new market in India. That’ll be a big focus for us.”
Trade’s ‘golden weather’ seeing stormclouds
Vitalis said the Government was committed to doubling Aotearoa exports by 2034, a major driver of that being dairy exports.
But bad behaviour from economic powers like the US and China was now eroding trade ties that took decades to build and honour.
“It’s not about China, it’s not about the United States. It’s about the big guys feeling that they can act outside the rules now. That is not something we’re used to,” Vitalis said.
“For the first time in New Zealand’s history with the United States, we’re paying tariffs that we’ve never paid before on wine, kiwifruit and beef.”
Vitalis said Minister for Agriculture Todd McClay had already written to US President Donald Trump asking for New Zealand to be on the list if the current 10% tariff was ever to drop.
MFAT’s chief trade negotiator said the establishment of the World Trade Organisation (WTO) in 1995 heralded “the golden weather” for international trade.
The WTO subsequently enforced claims made by New Zealand against the US, EU, Australia and more recently Canada for giving their own producers an unfair advantage in dairy, sheepmeat and apple trade.
In September 2023, New Zealand won a trade dispute with Canada when it was found to be in breach of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) for blocking dairy exporters’ access to the Canadian market.
For dairy, major exporters like India and the EU are still subsidising local milk farmers to keep production costs down and prices competitive.
“The golden weather is well and truly over … We are in a much more challenging situation,” Vitalis said.
Free trade agreements
Vitalis said dairy was one of the country’s most exposed sectors to global trade turbulence.
Based on MFAT data, the average agricultural tariff is about 24%, but more than 47% for dairy largely due to uncompetitive behaviour in the global market.
“If we didn’t have free trade agreements (FTA), that would be in excess of 100%,” Vitalis said.
The Government is using FTAs to combat high tariffs particularly for dairy. He said the tariff equivalent for regions like the EU and Japan would be 132% and 180% respectively without FTAs with those nations.
That ensures Kiwi exporters maintain market access, even when big players don’t play fair, but also diversifies income streams.
About 22% of national exports went to China, based on MFAT data. Meanwhile trade with the US made up 16% of exports, while exports from New Zealand’s other FTAs, excluding the Pacific and Africa, made up 48% of all exports.
“That’s how we build resilience and create some certainty,” Vitalis said.
Farmgate
This week, Fonterra told dairy farmers to expect a 2025/26 farmgate milk price in the range of $8 to $11, a very wide range that reflected a number of scenarios that could yet play out.
But it comes after a period of very strong pricing of New Zealand dairy. Fonterra chief executive Miles Hurrell said the current season’s range of $9.70-$10.30 with a midpoint of $10 per kgMS” was “driven by strong demand for our milk price reference products”.
Dairy was also a major contributor to Aotearoa’s most recent trade surplus of $1.4 billion in April, up from a $12 million deficit in the same month last year. Milk powder was the biggest contributor, raking in $1b that month.
But Hurrell also warned of “ongoing geopolitical uncertainty and the potential for a wider series of outcomes across the season”, while DairyNZ head of economics Mark Storey said the industry was “totally dependent” on the global market, which was proving more volatile and uncertain every day.
“We have no option but to be competitive and amongst the world’s best, if not the most competitive,” Storey said.
Kiwi dairy farming was cost competitive with major producers like the US, Australia, Ireland and South Africa. In the last 20 years, New Zealand dairy farmers spent about US$12 less per litre of energy-corrected milk (ECM) than US dairy producers.
Storey said it was a “good news story” for those who were farming, who had “done amazingly well over 20 years to keep this cost differential”.
One salient data point was that feed costs made up about 26% of spending per litre for US farmers, compared with about 15% in New Zealand, based on DairyNZ data. But Storey said that cost advantage needed to be protected to withstand intense trade volatility in today’s market.
That meant lifting productivity, which he said farmers had also achieved – DairyNZ’s Production Per Cow index estimated production has been growing steadily since 2005 from a baseline of one to about 1.3 in 2023.
In light of dropping herd numbers and farming land use over that time, Storey said, that was also “undoubtedly a success story”.
Returns
But the other side of that was while returns were healthy now, profitability had not grown as steadily over time as costs ploughed into dairy farming to drive productivity.
The group’s Terms of Trade index ‒ a measure of how much the price of an asset fluctuates over a specific period ‒ jumped significantly into volatile territory since the 2015/2016 season, and was still considered volatile, although it flattened out over the 2022/2023 and 2023/2024 milking seasons.
“There’s a strong relationship between terms of trade and profitability, stronger than the relationship between productivity and profitability,” Storey said.
That means more global trade uncertainty is likely to flatten returns for dairy farmers as trade talks progress, and showed up in the most recent global dairy trade auction when the index fell for the first time since early March.
“It’s been volatile and it will remain volatile,” Storey said. “But it’s largely outside of our control.”
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