Meat and dairy

Meat

Figures from rural data specialist NZX Agrifax show that the beef price received by our farmers has fallen by 24 percent since September. However, the retail price for 1kg of steak has fallen by just 1 percent.

Con Williams from Meat and Wool New Zealand told us 70 percent of the farm-gate beef price came from world prices and changes in the value of the Kiwi dollar; for lamb this figure is higher at 90 percent. Farm-gate prices for beef and lamb vary through the season. In January prices were higher than in previous years because of a lower Kiwi dollar and a shift in demand in our export markets towards the lower-category meat cuts New Zealand supplies.

The supermarket prices we pay don't fluctuate greatly from season to season but Con's view is that they do reflect these underlying international pressures.

Professor Keith Woodford of Lincoln University told us that world lamb prices have been unsustainable for some time and so farmers had cut back on flock numbers. He said there was now such a shortage of export lamb that a bidding war had erupted between the processors. The upshot has been that lamb prices to farmers have been high this season and this has flowed through to the local market.

Dairy

World dairy prices have been among the hardest hit, falling 43 percent since September (or 25 percent in NZ dollar terms). But there's been little to show for the fall here. We think a drop of 47 cents in the price of 500g of butter doesn't cut it; neither does a drop of 93 cents in the price of 1kg of cheese.

In June 2008 in our dairy prices report we looked at Fonterra's dominant market position and concluded that consumers might be getting a rough deal. What's happened since September does nothing to make us think differently.

Because dairy processors like Fonterra can store what they make, they can stockpile their products rather than putting them straight on to the market (which would cause prices to drop). A global market report published by the US Department of Agriculture in January indicated that New Zealand and Australian dairy processors were stockpiling their product in higher volumes than was usual for this time of year.

Retail prices won't really go down until stockpiling gets too expensive - and even then you should expect "discounting" rather than a permanent fall in price (see "When is a price cut not a price cut?" below). Stockpiling dairy products may provide some support for farmers' incomes but it does little to reduce the pain in consumers' wallets at a time of falling world commodity prices.

When is a price cut not a price cut?

When it's a "temporary" discount. Selling is a mind game. Companies are reluctant to cut the normal shelf price for household staples if their customers have already accepted big price increases and haven't cut back much on what they buy.

Consumer acceptance of high prices is difficult to get and companies aren't keen to see it whittled away.

Instead, when prices have overshot significantly (as they seem to have done for dairy products) and a large fall is needed to clear unwanted stocks, you'll see plenty of "temporary" price reductions. But don't expect to see large cuts in the standard price - it's what economists call "sticky downwards". Of course, when it was heading upwards it was a lot less sticky!