Record production, strong returns and rising costs: What’s next for New Zealand’s dairy industry?
Record production, strong returns and rising costs: What’s next for New Zealand’s dairy industry?
“After several years of consolidation, the industry has moved back into expansion mode, supported by high farmgate milk prices, favourable seasonal conditions and improved balance sheets across many farming businesses. That production result has been matched by strong export returns.” – Chris Harvey, BDO Advisory Principal and dairy sector specialist
Dairy export revenue is expected to rise 5% to a record $28.6 billion in the year to 30 June 2026, supported by strong global prices, favourable exchange rates and record production. The Ministry for Primary Industries also expects a high farmgate milk payout to support farm returns. Looking ahead, export revenue is forecast to ease slightly in 2026/27 as global prices soften and domestic production pulls back from record levels, but prices are expected to remain high by historical standards. The outlook remains positive, but the next phase will require a sharper focus on profitable production, cost control and long-term resilience.
In this article, we explore the outlook for the sector and share key insights from Chris to help dairy farm businesses to move forward with confidence.
Strong returns have rebuilt confidence
Following a record $10.16/kg MS milk price in 2024/25, Fonterra has retained a strong midpoint forecast for the 2025/26 season at $9.70/kg MS. For the 2026/27 season, Fonterra opened with a forecast Farmgate Milk Price of $9.75/kg MS, within a wide range of $8.00 to $11.00/kg MS, this has since been reduced to $9.25/kgMS and a narrower range of $8.00-$10.50/KgMS. This gives farmers a degree of confidence as they plan ahead, while also reinforcing the need to budget for volatility.The sector has also strengthened its financial position. DairyNZ has noted a significant reduction in dairy farmer debt in recent seasons, while stronger cash flow and higher capital values have helped many businesses enter the new season with stronger balance sheets.
“For many farming businesses, this has created a step change. Stronger cash flow has allowed debt reduction, reinvestment and, in some cases, renewed appetite for expansion. We are also seeing land values appreciate in some regions, with particularly strong demand for dairy farms in the South Island.”
The margin challenge is back
While the income line remains healthy, costs are rising. Fuel, fertiliser, feed and freight, often referred to as the four Fs, are all under pressure, with global supply chain disruption and geopolitical uncertainty flowing through to farm budgets.DairyNZ is forecasting farm working expenses to rise to $6.19/kg MS for 2026/27. It also expects the average breakeven milk price to increase to $8.79/kg MS, up 36 cents on the current season. Farms are still expected to remain profitable under central forecasts, but the buffer is narrowing.
“This is not the first time the sector has faced rising costs after a period of strong returns. The difference now is that many farmers are entering the cycle with stronger balance sheets, better data and more options. The challenge is to use that position carefully.”
Focus needs to be on profit
The focus for the year ahead cant be on production at any cost. That means stress-testing budgets against different milk price, cost and production scenarios, and understanding which inputs are genuinely driving margin.“Spring will again be an important period. Decisions around fertiliser & supplementary feed, given significant price rises, will have a significant impact on both cash flow and profit outcomes. Farmers should review their seasonal plans early, build in contingency and avoid locking in their input costs without a clear return.”
Capital, ownership and investment are changing
Stronger profitability is also changing how dairy looks through an investor lens. With improved returns and stronger balance sheets, the sector is attracting renewed interest from investors but also alternative capital providers.Alternative sources of capital outside the mainstream banks may play a growing role in succession, expansion and farm business restructuring. This can create more flexibility, but there will no doubt be a number of subtleties to consider.
Succession remains one of the biggest structural challenges facing the sector. With many farms expected to face ownership or succession decisions over the next decade, family businesses should be having clear conversations now about future expectations, management, ownership and likely capital requirements.
Technology is becoming a competitive advantage
Interest in technology adoption is growing across dairy, from animal wearables and virtual fencing to improved pasture, feed and herd management systems. These tools can support productivity, animal welfare and labour efficiency, but they also introduce new considerations around capital investment, data use and operational change.The opportunity is not simply to adopt new technology because it is available. The opportunity is to invest where it supports the farm’s strategy, reduces risk or improves decision-making. Farmers should be clear about the problem they are trying to solve before committing capital.
What dairy farmers should be thinking about now
The sector is in a strong position, but the next season will test how well farmers can convert revenue into sustainable profit. The best-prepared businesses will be those that use current strength to make deliberate decisions, rather than assuming recent conditions will continue.Chris recommends that dairy farmers take some time to:
- Review budgets against multiple milk price and cost scenarios.
- Focus on margin per kg MS, not production alone.
- Be selective with fertiliser, feed and capital spending.
- Use stronger cash flow to reduce risk, strengthen the balance sheet and invest strategically.
- Start succession and future strategy conversations early, particularly where a number of the family are hands on involved in the business.
- Assess technology investments against clear commercial outcomes.
“New Zealand dairy has had an exceptional run, and the fundamentals remain strong. But high prices do not remove the need for discipline. Rising costs, succession, technology adoption and regulatory uncertainty all require active management. For dairy farming businesses, the priority now is to protect the gains made over recent seasons and position for the next cycle. That means strong forecasting, clear governance and a willingness to make decisions based on long-term value, not short-term confidence alone.”
