New Zealand, which only consumes 5 per cent of the dairy goods it produces, relies heavily on export markets, and particularly new markets for growth of its dairy commodity sales. The country's output of commodity products like skimmed milk powder, butter and cheese has been growing by an average 5 per cent annually over the last 10 years, reveals the report by Rabobank, and much of this increased production is going to emerging markets in the Middle East and Asia. Asia now accounts for 40 per cent of New Zealand's export volume, with 7 per cent going to China and 6 per cent to the Philippines. But while China is said to be the world's fastest growing dairy market, domestic production is increasing at a much more rapid rate than the Middle East. With significant investment in new herds and breeding to increase domestic raw milk supply, many in the industry expect Chinese dairy production to catch up with demand in the long-term. In the Middle East however, only a couple of countries such as Saudi Arabia and Algeria are encouraging domestic production, says report author Hayley Moynihan, and it is unlikely to keep pace with demand growth. Demand is strong, boosted by rising oil prices and the resulting increase in wealth in the Middle East. "There appears to be a strong correlation between whole milk powder imports to the Middle East and oil prices," explained Moynihan. As a result, this region now accounts for 18 per cent of New Zealand's total dairy exports, or a quarter of its whole milk powder (WMP) exports and 24 per cent of its butter, compared with only 14 per cent of exports in 2004. Total sales to the Middle East exceeded NZ$1 billion (€518m) for the first time in the year ended June 2006, according to the report. Rabobank expects demand for dairy products from this region and North Africa to grow at around 5 per cent per annum through to 2010. However New Zealand will not meet all of this demand, with European and other processors already making increasing sales in this region. Moreover New Zealand's production is expected to slow in coming years, restricted by high land prices and higher costs. Tapping the opportunities in developing dairy markets is therefore set to become more challenging, after a 10-year 'honeymoon' period for the industry marked by record production levels and stellar international commodity prices. Land prices have almost doubled in the last five years and fertiliser and animal health costs are also up by nearly a fifth during this time. These factors will restrict expansion, says Moynihan. "We expect a lower rate of growth going forward, at around 2-3 per cent per annum," she told AP-Foodtechnology.com. Global growth in demand for dairy could increasingly be met by new exporters such as Argentina, Brazil and Ukraine, she added, rather than established exporters such as Australia, currently battling drought, and the EU, with reduced stocks following changes to subsidies. As production growth slows, New Zealand's dairy industry will have to look for greater value from its exports rather than new market share. "Exporters have already been looking to raise the value for a number of years and this will continue to be a greater focus," Moynihan believes. Fonterra, the co-operative that controls 95 per cent of the country's dairy exports, has been investing in higher value dairy ingredients such as milk proteins to increase margins. New entrants to the market, such as Open Country Cheese, may also seek to target higher value niche markets.