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.
New Zealand milk prices are “astoundingly high” – and we might have supermarkets to blame, one marketing expert says.
Bodo Lang, head of department at the University of Auckland Business School, said the price paid by New Zealanders stood out internationally.
“Particularly when considering that New Zealand is home to one of the world’s largest dairy companies, Fonterra. The problem, however, is not restricted to milk. Other dairy products too have, in comparison with other industrialised nations, exceptionally high prices.”
He said a litre of fresh milk in Germany was selling for the equivalent of $1.51, compared to $2.37 in New Zealand.
For many people, a bottle or two of milk is as much an essential part of their supermarket shopping as a roll of toilet paper or a loaf of bread. But the cost of milk has not had a straightforward history in New Zealand.
Until 1976, milk prices were set by the government and a subsidy was paid to producers to cover the shortfall. When that changed, milk prices doubled to the modern equivalent of about $2.26 for two litres.
The subsidy was completely removed in 1985 and by 1993, milk could be sold at any price. In January 1994, two litres was selling for the modern equivalent of $3.95.
Since then, the price has bumped around a bit, with notable peaks in 2008 and 2011, but has generally risen in line with inflation.
The cheapest milk you can buy today is cheaper than it was 10 years ago.
In August 2008, the cheapest two-litre bottle on supermarket shelves was $3.36, the equivalent of $4 now.
This month, you could buy a two-litre Homebrand bottle for $3.50 – or spend up to $6.55 if you wanted to splash out on Meadowfresh’s organic trim product, according to Countdown’s online shopping website.
Consumer NZ estimates that for every $3.56 bottle of milk (an average retail price at present), about $1.19 would go to the farmer, $1.91 to the processor and retailer and 46c to GST.
So who determines what milk costs?
WHAT FARMERS GET
Infometrics economist Brad Olsen said New Zealand was a slightly strange market because Fonterra was so dominant here.
In more competitive environments, you might let the market decide what was an appropriate price to pay farmers.
But here, Fonterra takes so much of what farmers produce – about 82 per cent nationwide, that that wouldn’t work.
Instead, Fonterra, overseen by the Commerce Commission, has to work out the highest sustainable price it can pay its farmers and still make an adequate return.
To do that, it looks at the global dairy trade, to see what dairy commodities are trading for internationally, and “price-reference commodity products” – whole milk powder, skim milk powder, anhydrous milk fat and buttermilk powder. Then it takes off its operating costs and capital costs to determine the farm gate price.
That means what farmers are paid depends a lot on what international consumers want and are willing to pay for our products – not just what you pay when you pick up a couple of litres from the supermarket.
Olsen said, because a lot of Fonterra’s product becomes milk powder, it does not generate as much of a return as it might if it was selling a higher-value product into international markets.
HOW SUPERMARKETS SET PRICES
Supermarkets buy their milk from local distributors, either direct from Fonterra or other processors such as Synlait, or from suppliers who had value along the way.
A Countdown spokeswoman said the biggest driver of price was what Fonterra was paying farmers – as well as other costs associated with getting it to stores.
“Where we receive lower milk prices from our suppliers, we pass these on to customers but likewise when the farmgate price increases that influences what customers pay for milk too,” she said.
A spokesperson for New Zealand-owned co-operative Foodstuffs said its retail price takes into account the wholesale cost into the business from suppliers, which can change according to the price they can achieve on the global market.
“Then we add our own costs which, as you’d expect, include wages, salaries, transport, refrigeration, taxes etc.”
The spokesperson said it aimed to be competitive, to try to ensure this fridge staple is as affordable as possible for New Zealand households.
“Milk is usually one of our Every Day Low Price products – loss leader is a bit of an outdated term in grocery today. We offer a range of milks from private label to branded milks – each with different characteristics or appeal to different segments of the market.”
But Olsen said supermarkets exerted more control over the price than that.
He said the retail price was a commercial decision for supermarkets to make. They were sensitive to the price of milk and wanted to avoid large price movements.
While people might respond to swings in the price of something such as avocados by not buying them, supermarkets did not want to risk people saying they could not afford to buy milk.
Some supermarkets or dairies might choose to sell their milk as a loss leader from time to time, losing money on the sale in the hope that people who came in for the cheap milk might buy other things, too.
Lang said this was where a lot of the problem originated.
New Zealand shoppers had become used to high prices, smaller economics of scale, and manufacturers often using export prices as a reason for setting New Zealand prices, he said.
“New Zealand food retailing effectively is a duopoly.
“One of the key reasons for Germany’s low grocery prices are high levels of competition with multiple large chains operating there. It is unlikely that New Zealand will ever attract the same level of competition but it is not a far stretch to suggest that even the entry of one more supermarket chain would likely bring prices down, so that New Zealand shoppers could enjoy more reasonable grocery prices.”
Jessica Wilson, Consumer NZ’s head of research, said what New Zealand paid was skewed by international prices because so much of what was produced here was turned into commodities for export.
“But the price we pay also reflects the concentrated nature of our market. Our domestic milk market is dominated by one big supplier, Fonterra, and two big supermarket chains, which means there’s little competition for your dairy dollar.”