Milk margins

According to the International Farm Comparison Network (IFCN), the cost of producing milk in New Zealand is cheaper than in almost any other OECD country – and cheaper than in many non-OECD nations. We rank between India and China on the IFCN's production costs table.

But cheap production doesn't mean cheap milk. The amount consumers pay is influenced much more by the farmgate price – what farmers get for the milk their cows produce – and wholesale and retail margins. Information on how either is set is protected like a trade secret.

Fonterra keeps an extremely tight rein on its dairy price manual, which contains its formula for calculating farmgate prices. But the overall price trend is up. A recent international comparison by the Dutch Federation of Agriculture and Horticulture shows Fonterra's farmgate price increased 34 percent in the year to February. The average increase in Europe was 19 percent.

What about wholesale and retail margins? Our calculations suggest they've been at the top end of the scale. Based on available data, we estimate that in 2008/2009 the combined wholesale and retail share (excluding GST) of the cheapest 2L carton of milk was 70 percent. That compares with 54 percent in the US, 60 percent in the UK and 64 percent in Australia.

Margins dropped in 2007/08 following a record payout to farmers of NZ$7.59 per kg of milk solids. But figures for 2005/06 and 2006/07 show wholesalers' and retailers' share of the retail price was around the 70 percent mark in both years. Our calculations are based on the cheapest carton of milk – the margin on more expensive “branded” milk will be higher.

IFCN data published in 2006 also suggest wholesale and retail margins have been higher here than in the many other countries. Of 25 nations surveyed by IFCN, 20 had lower margins than us.

Differences in domestic markets and farmer subsidies will have something to do with these variations. But the results raise questions about whether we're paying a fair price. Even a few cents more on the retail price could mean millions of dollars in extra revenue are being made somewhere along the supply chain. Fonterra says it makes around 30 cents on every 2L bottle of its branded milk.