Dairy makes up almost a third of export value but is also costly to the environment.

NZ is known for its dairy products, and is home to one of the biggest dairy companies in the world. In this Stuff special investigation, we examine how the price of milk is set and explore the industry behind our liquid asset.

Forget the $16.6 billion a year that dairy exports earn; environmentalists say the costs to natural systems are not properly taken into account when the sums are done.

In fact Victoria University ecologist Dr Mike Joy co-penned a study three years ago which said the costs of repairing the damage from dairy farming could be as high as $15b.

Dairying's impacts are chiefly: the amount of water used to create milk; the effluent that pollutes the soil, aquifers and waterways; the way in which soil is compacted by heavy animals; and the greenhouse gases that cattle emit.

In addition dairy processors are significant energy users and greenhouse gas emitters. Fonterra burns about 410,000 tonnes of coal to turn liquid milk into powder.

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SUPPLIED Fonterra milk tankers leave the Darfield plant, where coal is burned to turn dry milk into powder.

Based on one tonne of coal producing 2.86 tonnes of carbon dioxide, Fonterra's factories pump out 1.17 million tonnes of the climate warming gas, making it one of New Zealand's top greenhouse gas polluters.

The dairy industry counters the attacks by acknowledging that rapid growth has put pressure on the land, water and air, but it is trying to address the issue through a range of initiatives.

In the meantime, though, there is a time lag between now and when some of these attempts at mitigation take effect.

Water use

International lobby group Water Footprint Network estimates that it takes 1000 litres of water to produce 1 litre of milk, although this figure has been disputed.

What is not in doubt is that dairy is a large scale water user - in fact it is the single biggest consumer of irrigation, accounting for about 44 per cent of all consumption. Most is allocated in Canterbury, followed by Otago.

The answer to how much water is used to make a litre of milk is not simple: it depends on a climate, soils, how the land is irrigated, the type of pasture and cow.

In regions such as Waikato and Taranaki, most milk is created through rainfall, but not so in Canterbury.

TETSURO MITOMO/STUFF Irrigation is the single largest consumer of water in New Zealand.

​AgResearch has done the sums. Its results? In Waikato about 945 litres of water are needed to produce 1 litre of milk; in Canterbury, 1084 litres.

So in fact these figures are remarkably close to Water Footprint Network's estimate.

Effluent

What goes in must come out - a cow produces the equivalent waste of 14 humans. Therefore the approximately 10 million cattle in New Zealand create as much waste as 140 million people.

SUPPLIED Dairy effluent still makes its way into streams, such as this in Taranaki recently.

Some cow effluent is captured in the soil but not all, and the remainder ends up in aquifers or rivers and lakes. The problem is worse if the soils are porous, such as in Canterbury.

The Ministry for the Environment reported last year that between 1994 and 2013 phosphorus pollution was lessening at the sites it monitored, but nitrate was worsening (55 per cent) at more sites than improving (28 per cent). Nitrogen leaching from agricultural soils was estimated to have increased 29 per cent from 1990 to 2012.

Joy calculates the potential cost of removing nitrates from drinking water at $10.7b.

"We are saying these are the costs of cleaning up water to drinking standard, but that is conservative because humans are much more tolerant than other forms of life. But at certain levels of nitrates below what humans can tolerate, a lot of freshwater fauna is dead," he said.

Federated Farmers vice-president Andrew Hoggard has disputed the figures, saying it assumes all nitrogen from dairy goes into water, there is no dilution from rainfall, and all water is used for drinking.

He added that if nitrate levels were reduced to zero rather than the drinking standard, then it could cost $10b to clean up, "but this is a not our reality".

Greenhouse gases

Former Parliamentary Commissioner for the Environment Jan Wright warned farmers two years ago they had to take more responsibility for greenhouse gases.

GEORGE HEARD/STUFF It takes one 1000 litres of water to produce one litre of milk.

About 43 per cent of New Zealand's greenhouse gases are caused by methane and 11 per cent by nitrous oxide, the first generated by all livestock burping, the latter mainly by cows urinating.

A single dairy cow generates about 3 tonnes of carbon dioxide equivalent every year in the form of methane.

The Government has set up a Climate Change Committee, including Wright, to investigate whether agriculture should be included in the Emissions Trading Scheme.

Scientists and companies are looking at technological fixes: in two years' time New Zealand could be the first country in the world to change a cow's diet so it burps out less methane.

Other programmes include a vaccine that will inhibit methane by 20 per cent, but success is at least a decade away; and breeding low emission cattle and sheep.

Soil compaction

Cows aren't light. The average weight of one of the common breeds, the holstein-friesian, is more than half a tonne.

The average number of milking cows in New Zealand herds is 414, adding up to several hundred tonnes of livestock pressing down on the soil, intensifying during wet weather.

Soil compaction has been identified as the most significant soil quality issue in Waikato. Joy and his co-authors have put a price of $611m on addressing the problem.

DAVID UNWIN/STUFF A cattle beast in a respiration chamber at the Agricultural Greenhouse Gas Research Centre in Palmerston North.

Facing the issue

Farmers and farming leaders are on the back foot but say they are starting to address the issue, instead of avoiding the "dirty dairying" charge aimed at them by Fish and Game in the early 2000s.

Pre-election last year they pledged to make all New Zealand rivers swimmable, although they didn't say how or by when.

Confessing that not all rivers were in the condition they wanted them to be, and that farming had not always got it right, the group said the vow was "simply the right thing to do".

A Dairy NZ spokesman said farmers were much more efficient over their use of effluent than 20 years ago and had fenced off 26,197 kilometres of rivers, as well as planted around waterways.

He said pastoral farming was often better for soils than tilling them.

"They are generally higher in organic matter, in good physical condition, have good nutrient status and the soils are less depleted than elsewhere in the world because farmers add nutrients through fertilisers."

But under the new Government, change is happening.

Later this year Environment Minister David Parker will set nutrient limits for catchments through a national water policy statement. Regional councils will then decide the level of nutrients individual farmers can discharge.