No need for another investigation into milk price

The Ministries of Agriculture and Economic Development and Treasury havelaunched a second probe into Fonterra’s pricing of milk.

They could save themselves a lot of time and effort by reading the National Bank’s Agrifocus which says :

On the face of it, it seems the rise in the price of fresh milk can be largely explained by the increase in international dairy prices and on-farm costs. Furthermore, the increase in fresh milk prices has not been out of step with the increase in the price of other staples. Its per unit cost when compared to other substitutes is particularly curious as it takes a considerable amount of money to produce, collect, transport, process and manufacture, store, ship and keep cool. In many cases milk is a far superior, nutrient–rich product.

If price increases alone are the precursor to an inquiry, then we would seem to need a lot of inquiries into other areas! Of course this will not be the case. The real issue is how economic agents adjust to the realities of a rising trend in real commodity prices – a reverse of the trend seen over the prior century.  New Zealand benefits hugely from such a trend, though there is a consumer cost along the way.

We export food and those exports are one of the few bright spots in the economy at the moment.

When demand and prices are high on international markets the price increases on the domestic market.

That doesn’t make it easy for people struggling on tight budgets but the problem isn’t high export prices it’s low incomes.

The report looked at the  rising cost of milk must be considered in conjunction with comparable movements in other staples and substitutes; rising input costs at the different levels of the supply chain; and international dairy prices.

Looking at the price movements of key foodstuffs over a 10 year period shows that the price of fresh milk has increased by 36 percent over this period, or 3.6 percent per annum. Over the same 10–year period, the headline inflation rate has risen 31 percent. Interestingly though, the price of different types of meats, bread and other dairy products, such as cheese, have all increased more than fresh milk over the last 10 years! The price of sheepmeat is the front-runner, increasing 73 percent over the last 10 years, over twice the rate of headline inflation.  There is some irony in this.  Economists normally point to competition as a way of keeping a lid on prices and there is certainly a lot of competition in the sheepmeat industry, so much in fact that people are calling for consolidation! So here we have an industry that has more competition and fragmentation than the dairy sector, which has seen higher price rises!  Of course, the underlying causes of price movements are far more extensive than that (i.e. reduced sheep numbers has led prices higher) but we still thought it worth noting.

Prices have gone up but let’s put it in perspective. A comparison with other liquid products (which don’t have the nutirtional benefits milk does) shows:

 It costs $1.84 for a standard litre of milk, $2.73 for a litre of bottled water, $1.52 for a litre of fizzy, $1.92 for fruit juice and $5.12 for a litre of beer (according to Statistics New Zealand).The price differential between milk and water is particularly curious in a country such as New Zealand where it is fine to drink water out of the tap.

In addition, we are trying to move up the value–added chain as an exporting nation but sometimes bemoan some brand–based products.  The suggestion that some branded milk products are priced too high seems perverse when we have constantly been told by various commentators, academics and successive governments that we need to build brands and market our products to add greater value (i.e. extract more money out of consumer wallets).  Especially when you consider the tap water/branded water differential!  It would be nonsensical to suggest that dairy companies should build brands offshore but not try to do the same in the domestic market. The discontent at the price of branded milk products seems to go against all the business principles that various individuals have preached over the last 20 years. And there is always the simple fact that if you cannot afford the branded product you can always purchase the unbranded one, which particularly in the case of fresh milk is very close in quality and content.

The other factor which impacts on the milk price is the cost of production.

Dairy farm total input prices have increased by nearly 34 percent, 3 percent more than aggregate consumer prices, and 2 percent less than the price increase for fresh milk.This would, on the face of it, seem to explain nearly all the observed milk price increase over the past 10 years. Ultimately, a complete examination would include other parts of the supply chain, notably the dairy processing sector, the two New Zealand supermarket chains and local dairies. This analysis would include margin and cost movements, but because of commercial sensitivity, it is difficult for us to obtain a complete dataset that would allow a full assessment for fresh milk.

Eleven of the 17 farm working expenditure categories have increased more than the price of milk.

The main culprits are fuel and electricity, which have increased a whopping 92 and 87 percent respectively over the last 10 years, or 9.2 and 8.7 percent respectively year-on-year.

One of the reasons fuel and electricity prices have increased is the imposition of the ETS. If Labour acts on its threat to force farmers to pay additional ETS levies it will impact on the price of milk.

7 Responses to No need for another investigation into milk price

  1. johnsonmike says:

    That doesn’t make it easy for people struggling on tight budgets but the problem isn’t high export prices it’s low incomes.

    Look I don’t have any problem at all with milk prices, they are set by the market, but it’s a bit rich of you tocite “low incomes” as a problem when you regularly call for lower incomes in the form of youth wages and no increases in the minimum wage, etc.

  2. homepaddock says:

    The best way to increase incomes isn’t by mandate but by economic growth.

  3. johnsonmike says:

    But you want to mandate lower pay. The inconsistency is glaring Ele.

  4. homepaddock says:

    Only because mandating higher wages for young peole has had such an awful impact on youth unemployment.

    None of our staff is on the minimum wage – it’s a floor not a ceiling.

  5. JC says:

    “But you want to mandate lower pay. The inconsistency is glaring Ele.”

    No it isn’t. Labour arbitrarily abolished youth rates in 2008 which, with the economic situation, saw youth unemployment soar from 16% to 27%.. and 50% in Northland. OTOH older worker unemployment is still less than 4.5%.. you’d almost think Labour and the unions conspired to protect the jobs of older Pakeha workers.

    Restoring the youth rates, ie, the long term default situation, may or may not help but I dont think the Govt has much choice if its to be seen to care about youth.


  6. johnsonmike says:

    No it isn’t.

    Ele wants mandated lower pay for some workers, but opposes mandated higher pay for others. That is very inconsistent, especially when she also says the problem in NZ is that wages are too low.

    Personally, I’m not philosophically happy with mandated wages for anyone. As with the price of milk, I think it’s best left to the market.

  7. homepaddock says:

    Higher minimum wages and no youth rates price people out of the market – I don’t see why you think I”m being inconsistent.

    “Personally, I’m not philosophically happy with mandated wages for anyone. As with the price of milk, I think it’s best left to the market.”

    We’re on common ground here.

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