The last 20 years of runaway growth for the New Zealand dairy industry will soon come to an end as environmental limits are reached, Rabobank says.
Investment in new farm conversions and the expansion of existing platforms had already trickled to a standstill, it said in a new report.
As a result, New Zealand dairy processors will struggle to fill existing and planned capacity in coming years, leading to more cautious investment.
But Rabobank forecasts this could be good news for farmers as processors fight "fiercely" for milk.
The predictions are made in a report called "Survive or Thrive", which looks ahead to 2022.
Analyst Emma Higgins said the slowdown in New Zealand milk flows would have vast implications for the entire supply chain.
She said that for the past 20 years New Zealand milk supply had doubled, growing at a rate of 4.1 per cent a year, but forecast this to fall to about 1.6 per cent a year for the next five years.
The bank had signalled a slowdown five years ago, but it had taken longer than expected for the brakes to be applied.
Falling prices had seen a drop in milk collection in both 2016-17 and last season, but the recent bounce back should see a short-lived spike in production of between 2-3 per cent for 2017-18.
"Regions are still undergoing their nutrient-limit setting process, so we've still yet to see those limits become enforceable, and higher-than-expected farmgate milk prices have also extended the run."
Asked how the NZ Labour Party's water levy would impact on the sector, Ms Higgins said it was too early to decide, although any increased costs usually had an impact on production.
"The devil will be in the detail, we'll know when we get some numbers," she said.
Ms Higgins said the roller coaster ride farmers had ridden with regards to prices would continue, forcing them to run low-cost production models.
"I don't see milk price volatility changing soon, given New Zealand's reliance on the global market," she said.
"But it also comes back to processors and their strategies."
Rising land values, which had fuelled dairy expansion, would not be a feature of the next five years, and farmers would not go into debt in order to expand.
Fonterra's new limits on palm kernel expeller (PKE) use by its suppliers would also remove one of the potential levers of growth, although there would be a lift in productivity through better genetics, improved pasture species and a higher uptake of technology.
Increased competition for milk will benefit farmers, with sharper pricing and a wider range of contractual options.
Fonterra, Open Country Dairy, and Westland were the most-exposed processors if they lost milk supply, and farmers in the Waikato, Southland, and Canterbury had the most to gain.
Processors may reward farmers if they meet strategic objectives such as producing grass-fed, free range, or PKE-free milk.
Ms Higgins predicted farmers would not go down the path of intensive feeding systems because of the risks of higher infrastructure costs, more expensive high-energy feed, and the need for a different set of management skills.
Between 2013-15 some processors had invested in capital expenditure, partly to meet the flood of milk, but also as part of specific growth strategies. They risked the plants being persistently underused, with a possibility of assets being sold off.
Higgins predicted it would be harder for overseas investors to enter the industry. Companies such as Vinamilk, Yili, Yashili, and Bright Food have all entered into the local market to obtain high-quality, close-to-market dairy from a growing supply base that is cost-competitive.
As milk volumes tail off, the smaller new milk pool will lift costs for investors, and it would be harder for projects to reach optimal capacity and protect milk supply.
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