An occasional history of dairy exports

Before the NZ-China free trade agreement, few of our 'key' markets proved to be reliable.

In this post I’m going to run through a few charts about how our dairy export markets have evolved over the years. This is something of an addendum to my earlier post on diversifying exports - in fact I was going to include this at the end, but I realised at the last minute that I’d forgotten a key detail and would have to redo all of the numbers. Still I think it’s worth sharing, because it tells an interesting tale of the difficulties of finding a dependable trading partner.

As I noted last time, our overseas trade has become significantly more concentrated in the Chinese market since the free trade agreement was signed in 2008, with about a quarter of our exports going there last year. Dairy products, our single largest export category, have been even more concentrated than that, with about 31% of our dairy exports going to China last year. That share did reach as high as 41% in 2021, though I think that had more to do with the relative openness of international markets during the Covid era, rather than any particular strength in Chinese demand.

When I was writing the previous piece, what occurred to me is that I didn’t really have a clear sense of where our dairy exports were going before the NZ-China free trade agreement. You can take a good guess at it - any country that you might reasonably name has probably been in the top 3 at some point. But I wasn’t sure if there was ever a time when our dairy exports might have been considered ‘well-diversified’.

I’m going to start with a snapshot of 1991. Before we get into it, I should note that our dairy exports have increased five-fold by volume since then (and over eight-fold in dollar value terms). So where you see a country’s share falling over time, it’s not necessarily because our exports to that market shrank - they may have just not risen as fast as the average.

Our top dairy export market in 1991 was the UK (with butter being the main product). As I mentioned in the earlier post, the UK was our dominant trade partner for a long time, and was still fairly important in the early 1990s. That’s going to change a lot as we go on.

The second largest market was the US. What’s notable about this is that the US is highly protectionist when it comes to dairy, with a system of tariffs and quotas on imports.

So how did they end up being such a large market for us? This is the key detail that I missed on my first attempt. A large share of our dairy exports to the US are in the form of a product called milk protein concentrate, which is not officially classified as a dairy product and hence isn’t subject to the same tariffs/quotas.¹ Indeed, as I understand it, MPC was basically invented in the 1970s for the purpose of getting around the US’s trade restrictions. It’s no secret that we’re doing it, but no-one in the US seems concerned enough to clamp down on it.

Third on the list was Japan - another big market for MPC. Japan remains an important market, but its share has fallen over time. An old and now shrinking population means that it’s not really a growth area for dairy products.

I’ve noted a few other notable markets on the chart above as well. Our exports to Algeria have waxed and waned over time, but they’ve become a reasonably large buyer again in the last couple of years. I’m not sure whether it’s strong demand from Algeria itself, or if it acts as an entry port for other parts of Africa.

Malaysia was already a fairly big market in 1991, and has remained so since then. You’ll notice that only a couple of South-East Asian names stand out in the chart above, but that will change as we move forward.

Mexico was a notable market in the early 1990s, particularly for milk powder. However its share dropped off after 1994, presumably because NAFTA made it easier to meet its dairy import needs from the US.

The final one I want to note for this year is the USSR. That year was a high point for our dairy exports to Russia, and it’s possible that they were even paying us in dollars rather than Ladas by that time. This wouldn’t last though: the USSR collapsed in 1991, and our dairy exports went with it for a couple of years. While our exports to Russia did bounce back later in the 1990s, it was all downhill after that - and there are no prizes for guessing how much we send there today.

Now we’ll jump ahead to 2000. The UK market had significantly retreated by this stage, with its share plunging from around 13% in 1991 to less than 4% within a decade. That left the (highly-protected) US market as the major destination for our dairy exports. You’ll also notice more South-East Asian names standing out this time.

The mid-2000s were the point of ‘peak diversification’ for our dairy exports, based on a simple measure of concentration (the sum of squared market shares). But that diversification was not by choice - it was the result of losing ground in what were previously key markets, and limited success in reaching new fast-growing ones.

Finally, we’ll skip ahead to 2008, the last year before the NZ-China free trade agreement took effect. The US was still our biggest market, but there was a surprising #2: Venezuela. To be fair, this was an unusually strong year for exports to Venezuela, but it had been emerging as a major market for our whole milk powder for some time. I mention it here as another example of an unreliable trading partner: from here on, Venezuela increasingly became an economic and political basket case, and by 2017 our dairy exports there had dropped to zero.

There’s not much to be gleaned from these charts going forward. China’s share skyrockets from 2009, leaving everyone else is the dust (though often still growing in their own right). One thing to note is that the relative ordering hasn’t changed much since then: the US is still our second-biggest market, with Australia, Algeria and various parts of Asia also featuring.

One final point here is that we may risk missing the wood for the trees by considering market concentration/diversification at the country level. For instance, the European Union sets trade policy as a bloc, so any chance of expanding these countries’ share of our exports is really an all-or-nothing proposition.

Then there’s also the fact that we have long been heavily exposed to Asia even outside of China. The rest of Asia currently takes about a third of our dairy exports (and hasn’t ceded much ground since the NZ-China free trade agreement), even though no single country has a particularly high share.

That shouldn’t be altogether surprising, because Asia is a big region - we’re talking another 3 billion people on top of China’s 1.5 billion. And it’s debatable to what extent you can lump the likes of Bangladesh, Indonesia and Japan into a single ‘market’. But if you’re worried about China risks, whether economic or geopolitical, it’s fair to say that all of these countries are highly exposed in their own right.

1. More specifically: under the Harmonised System of international trade, dairy products are classified as HS 0401 to 0406. Milk protein concentrate is recorded under HS 3501 (caseinates). The idea seems to be that it has been transformed to the point that it’s more of an ingredient than a food in itself.