Food
Cost of living
Introduction
We investigate why the prices of food, petrol and electricity keep on rising.
International commodity prices are well down, the hydro lakes are full, oil prices are way down on last year. So why haven't food, electricity and petrol prices come down as well?
The reasons vary from industry to industry but they provide little comfort for consumers paying the bills.
Food prices
When world commodity prices were peaking in 2007 and 2008, consumers forked out what they were told was the NZ dollar equivalent of the world price for dairy and meat products.
At their worst (late last year), supermarket prices for butter and cheese were 89 percent and 62 percent higher than they were in 2007 (see our commodity price tracker for details). As well, beef prices were up 19 percent and bread around 30 percent.
But when the bottom falls out of the world commodity markets - as has happened in the last six months - New Zealand shoppers don't seem to benefit.
Part of the reason is the fall in the NZ dollar since September, which has made anything priced overseas more expensive. Our prices here still reflect the world price for commodities - and while the ANZ commodity price index shows that world prices for meat and wool products have dropped 19 percent since September, that's just a 3 percent drop once you take into account the fall in the NZ dollar.
But aggregate figures can only tell you so much. In this report we'll look at some of the details for meat, dairy products and bread.
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!
What about bread?
A loaf of bread costs around 25 percent more than a year ago, with much of the increase occurring in the past six months (see our commodity price tracker for details).
However, working out whether the cause is higher costs (of wheat, milling and baking) or higher manufacturer/retailer margins is far from straightforward.
Price of wheat
Figures from Federated Farmers show that wheat makes up around 16 percent of the price of a loaf of bread. Much of the wheat in our bread is grown here. Some is also grown in Australia or, occasionally, North America.
The price that local millers pay for wheat delivered to their mill - whether it's grown locally or not - reflects trends in world prices. Last year, because of the Australian drought, there was a sharp spike in the international spot-market price for wheat. (The spot market is where harvested wheat that's not under contract is offered for sale.)
A spokesperson for Goodman Fielder (the owner of Champion Flour mills) said spot-price changes didn't affect millers immediately. Millers will buy a significant quantity of wheat under year-ahead contracts with farmers. This means the price of much of the wheat used to make last year's bread was set in 2007 - when price levels were more moderate. And the price of much of the wheat being used now was set early in 2008, before the big spike in spot prices.
Without details of actual costs, it's impossible to know if the millers are charging fairly for flour. However, it seems the threat of customers importing flour directly might be enough to keep the two companies that dominate flour milling in New Zealand - Champion Flour and Weston Milling (owned by the Australian food firm George Weston Foods) - from being too greedy with their pricing.
Direct importing
Charlie Daily of Wholly Bagels told us that when the local price was too high his company directly imported premium flour. Charlie says he's sure he's getting flour as cheaply as possible, but his flour is still costing around 40 percent more than nine months ago. Wheat and flour are bulky to ship. Charlie said the rebound in petrol prices, the weak Kiwi dollar and other inflationary pressures seemed to be working to keep flour prices high.
Flour of course is only part of the bread story. When it comes to the bakery business in this country, we find things are carved up between two big firms - Goodman Fielder and George Weston Foods.
These are also the two companies that dominate our flour milling. Both make bread under household names: Nature's Fresh, Freya's, Vogel's, Molenberg, Country Life and other Quality Bakers brands are Goodman Fielder; Tip Top, Ploughmans and Burgen are George Weston Foods.
Change to house brands
We couldn't find out how well George Weston Foods was doing in New Zealand; but until recently Goodman Fielder seemed to be doing fine. It had a good run late last year as the darling of the sharemarket, outperforming other companies. But in February Goodman Fielder reported that customers were migrating to cheaper supermarket house brands and that its margins were coming under pressure - including those of its fresh bakery business, which provided around one-third of Goodman Fielder's revenue.
Are the two food giants gouging their bread-buying customers? Based on NZX Agrifax's commodity price figures we believe the cost of spot-market wheat has fallen by as much as 23 percent since September and the cost of contracted wheat has increased by up to 20 percent. During this period the retail price of flour has fallen nearly 3 percent. And the price of bread? It's up a staggering 18 percent. No wonder customers are voting with their wallets.
Given that the worst of last year's wheat-price bubble may be yet to have an impact on millers' costs, more bread price increases may be on the way. One thing's for sure, though ... while you can jump from one baker to another, it's a bit harder to drop bread altogether when the price goes up. That's something the bakery business will be counting on this year.
Petrol, electricity and LPG
As if having the skyrocketing price of bread wasn't bad enough, petrol has been on the way back up again. Not that you'd know it by looking at the world price of crude oil, which has been hovering under US$50 a barrel since last November.
It's not the oil producers that are to blame for this. The culprits are the international refinery companies, which seem to have taken the opportunity to expand their margins. Caltex Australia's latest half-year review shows how they do this - with "major planned maintenance" shutdowns and "unplanned shutdowns".
Basically the international refineries have been putting the brakes on production as quickly as they can, to "better align" supply and demand. And it seems to be working ... at least for their shareholders.
Electricity
When we looked at electricity price increases last June the standard industry justification was "demand has increased and electricity generation hasn't kept up".
Current wholesale prices for electricity are below last year's levels - so there's no obvious sign of a short-term mismatch between supply and demand. But retail prices keep rising. Meridian Energy is the latest to implement an increase: up 6.5 percent in mid March. Increases for some of Genesis's and Trustpower's South Island customers are coming soon. Since February last year electricity prices to residential customers have increased by around 13 percent.
Big profit increases
Recent profit announcements from the electricity companies give a clue as to what's going on. State-owned companies Genesis Energy, Mighty River Power and Transpower have been enjoying huge profit increases. Genesis Energy's profits in the six months to December were 56 percent up on the same period of the previous year; Mighty River's were up 34 percent; Transpower's were up 27 percent.
To justify these profit increases, the companies point to their plans to expand generation capacity and upgrade facilities. Transpower, for example, has $3.8 billion of investment planned over the next five years and is bringing forward maintenance work because of electricity failures in Auckland in February.
It appears, though, that the government may be getting less tolerant of the companies passing on anticipated costs through price increases. Simon Power, the Minister for SOEs, has said he wants to make sure the SOEs are "contributing to the economy in an efficient way". We hope that will mean closer public scrutiny of electricity-company costs and less tolerance of price hikes.
LPG no answer
If you don't like what's happening to your petrol or electricity prices, don't think you'll do any better by changing to LPG. The price of this has soared in the last few years. LPG is an industry concentrated in the hands of few players and its pricing is unclear. We think the LPG industry should get a re-look by the Commerce Commission (see our LPG prices report).
Our view
- Look out for temporary supermarket specials. Use them to lower your food costs.
- Use Powerswitch to find the cheapest electricity deals.
- Take sensible steps to lower your electricity use (like turning off appliances when they're not being used).
- LPG seems overpriced right now. It may not be the cheapest way to heat your house or run your vehicle.
- Companies with a strong market position seem to be trying to restore their balance sheets by increasing prices rather than working smarter. If enough companies do this, they'll end up crunching household spending and deepening the recession. Anti-competitive market structures that allow excessive pricing put at risk the whole economy, not just the consumers who bear the brunt of price increases.
More information
- Powerswitch - www.powerswitch.org.nz
More from consumer.org.nz
Report by Susan Guthrie