Just who’s milking it?

By global standards, New Zealanders pay a high price for the liquid that floats our economy. Susan Edmunds asks why.

Despite all the milk New Zealand produces, shoppers pay an astonishingly high price for it.

In Germany, a litre of fresh milk costs the equivalent of $1.51, while here it’s $2.37, says Bodo Lang, head of department at the University of Auckland Business School.

The size of our market and the dominant role of Fonterra, one of the world’s largest dairy companies, have a lot to do with that.

‘‘The problem, however, is not restricted to milk. Other dairy products too have, in comparison with other industrialised nations, exceptionally high prices.’’

PRICE HISTORY

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 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 says New Zealand is a slightly strange market because Fonterra is so dominant here.

In more competitive environments, you might let the market decide what is an appropriate price to pay farmers. But here, Fonterra takes so much of what its farmers produce – about 90 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 ‘‘pricereference 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 farmgate 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.

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, Olsen says.

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 add value along the way.

According to a Countdown spokeswoman, the biggest driver of price is what Fonterra is 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.’’

But Olsen says supermarkets exert more control over the price than that.

The retail price is a commercial decision for supermarkets to make, he says. They are sensitive to the price of milk and want to avoid large price movements.

While people might respond to swings in the price of something such as avocados by not buying them, supermarkets do not want to risk people saying they cannot afford 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 come in for the cheap milk might buy other things, too.

Lang says this is where a lot of the problem with the milk price originates.

New Zealand shoppers have become used to high prices, smaller economies of scale, and manufacturers often using export prices as a reason for setting New Zealand prices, he believes.

‘‘New Zealand food retailing effectively is a duopoly. One of the key reasons for Germany’s low grocery prices is 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, says what New Zealand pays is skewed by international prices because so much of what is produced here is 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.’’

Lang says other dairy

‘‘New Zealand shoppers pay just over three times as much [as Germans].’’ Bodo Lang, Auckland University Business School

‘‘There’s little competition for your dairy dollar.’’ Jessica Wilson, Consumer NZ head of research

products are similarly cheaper elsewhere. He found 125 grams of mozzarella selling for $1.53 in Germany, and 900ml of Movenpick ice-cream for $3.41.

‘‘The New Zealand equivalents retail for $6 and $12.22. In other words, New Zealand shoppers pay 157 per cent of what German shoppers pay for milk, 392 per cent for mozzarella and 358 per cent for Movenpick ice-cream.

‘‘Therefore, New Zealand shoppers pay just over three times as much (302 per cent) for these three products.

‘‘In other words, to get the equivalent prices in New Zealand, prices would have to be cut by two-thirds to reach German levels. Undoubtedly, this would have far-reaching social and economic implications. Imagine how some families would be impacted if they could cut their grocery bill by nearly 70 per cent.’’