Food
Dairy prices
Introduction
Dairy prices have spiked again. Are we getting a raw deal?
Think you're paying too much for milk? You're not alone. A survey of 1000 Kiwis commissioned by Consumer NZ found 91 percent thought they were paying a high price for milk compared with other supermarket staples.
79 percent also wanted an inquiry into dairy pricing. We're pushing for that too.
Rising prices
A trip to the supermarket to buy milk, butter and cheese costs around 50 percent more than it did five years ago (see the graph below). That rise is almost double the 26 percent jump in food inflation over the same period.
Consumers are told the amount they're forking out simply reflects what's happening in the rest of the world. Rising international prices inevitably mean increases in domestic prices – so get used to it.
But that's not the full story. The amount we pay also has a lot to do with the level of local competition – and there's hardly any sign of it. Our domestic milk market is dominated by one giant supplier and two big supermarket chains.
That's not the case elsewhere. In the UK, wholesale and retail competition has seen fresh milk prices drop by just over one-and-a-quarter percent in the year to February. Over the same period, milk prices here rose seven percent – and that’s excluding the October 2010 GST increase.
Dollar for dollar, we're paying more for milk than the Brits. Data from the UK's DairyCo show the equivalent of two litres of milk averaged NZ$2.11 in UK supermarkets over the five months to February 2011. Statistics New Zealand’s Food Price Index shows that the cheapest 2-litre bottle here averaged NZ$3.63 ($3.16 ex GST).
The make-up of the Kiwi market could mean we're paying more than is fair. Statistics New Zealand data show price hikes were higher here when world dairy last spiked about three years ago. In the year to May 2008, domestic prices jumped 23 percent. UK prices rose as well – but the increase was lower (16.6 percent). And it was also lower in the US (11 percent) and Australia (10 percent).
Guide to the table
Data are from Statistics New Zealand's Food Price Index.
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.
Who makes what?
Finding out exactly who's making what out of a litre of milk is hugely complicated by the concentrated nature of our domestic market.
Fonterra collects the majority of milk produced in New Zealand. That was the case 10 years ago when the mega-company was created and it remains the case today. Regulations are in place to "promote" competition but Fonterra remains top dog.
The company's nearest "rival" is Goodman Fielder, which markets the Meadowfresh and Naturalea brands. Goodman Fielder doesn't collect milk directly from farmers. It buys what it needs from Fonterra under the Dairy Industry Restructuring Act. The Act requires Fonterra to supply a set amount of milk to other processors to foster local competition.
But we don't think the Act is delivering. The Commerce Commission has determined that Fonterra’s breached the rules on three occasions by refusing to supply milk to other processors when requested. Fonterra has successfully appealed aspects of two of these cases and sought leave to appeal other aspects to the Supreme Court.
For its part, Fonterra argues that many processors buying its milk aren't selling it domestically. They're turning it into products for export. The company says this is contrary to the intent of the Act and it's lobbying for changes to stop competitors "gaming" the system.
Commerce Commission investigation
The Commerce Commission has announced it's undertaking a "preliminary analysis" to see whether an inquiry into the price of milk is warranted. It says it's received a number of complaints, including one from us, leading it to take a closer look at the milk market.
The commission's decision is welcome. But the extent of any investigation may be hamstrung by the Commerce Act. The Act allows a price inquiry to take place only in narrowly specific circumstances – as a result, they're extremely rare. The commission also has no powers to impose controls as a result of any inquiry.
Failing action by the commission, it's clear consumers deserve to know a lot more about how retail dairy prices are set. We've written to the Commerce Select Committee requesting an inquiry into milk pricing and competition in the domestic dairy market.
Why price matters
Milk products are a staple part of our diet. Low-fat dairy products are also recommended in dietary guidelines as an important source of calcium, protein, potassium and vitamin D. The Ministry of Health recommends eating at least two servings of milk and milk products a day.
Rising prices mean dairy products may become less affordable, particularly for lower socio-economic groups.
What we want
Consumer NZ has formed a coalition with other organisations to push for an inquiry into dairy pricing. Members of the coalition include the Federation of Family Budgeting Services, Salvation Army, Barnados, Manaia Health PHO, Presbyterian Support and Grey Power.
Kiwi farmers have a reputation as the most efficient dairy producers in the world. But that doesn't seem to mean Kiwi consumers get the best deal on dairy products. We should be able to have confidence we're paying a fair price for basic commodities – and Consumer NZ will keep calling for action on this issue until we're sure the price is fair.
Overseas prices
Australia
Supermarket price wars across the Tasman have seen milk drop to A$1 litre. The milk wars have prompted the Senate Economics Committee to launch an inquiry into the impacts of supermarket price decisions on the dairy industry.
Canada
Canadian farmers have generally received one of highest farmgate prices in the OECD, nearly twice what Kiwi farmers have been paid. Retail prices vary by state, with consumers in Toronto paying over 50 percent more than those in Winnipeg.
European Union
Farmgate and retail prices in the EU vary, largely depending on whether you're in eastern or western Europe. In the UK, wholesale and retail competition has led to a fall in retail milk prices over the last year.
United States
Data from the Bureau of Labor Statistics show the US farmgate milk price sits at around half the retail price. In February 2011, retail prices in US cities averaged NZ$2.32 for 2 litres of milk, compared with NZ$3.68 here.
Budget versus branded
Milk used to come in one size and flavour. But Fonterra and Goodman Fielder now "diversify" their product range to build shelf presence. So-called enriched milks (with added calcium, protein or ingredients such as omega-3) are all part of the diversification strategy.
Nutrition-wise, the only really meaningful choice when buying milk is between regular (blue top) and reduced or low-fat (green top). Our comparison of supermarket "home" brands with more expensive brands found little difference in nutritional content (see our "Milk comparison" table below).
That's not surprising. By far the majority of milk in supermarkets comes from the same supplier – Fonterra. Home brands contain much the same levels of protein and fat as branded bottles. All milk also qualifies for the description "good source of calcium". Our advice: shop on price.
Guide to the table
- A = 2L bottle purchased.
- Price is the price we paid in Wellington supermarkets in March and April 2011 and is not necessarily indicative of average retail price.
- Nutrition per 100ml is taken from the products’ nutrition information panels.
Survey results
Consumer NZ commissioned Synovate to survey New Zealanders for their views on milk and other dairy prices. The survey of 1000 Kiwis found:
- 87 percent have noticed an increase or large increase in the price of milk
- 91 percent believe the price of milk is high or very high
- 76 percent are concerned or very concerned about the price of milk
- 80 percent think milk prices would be lower if there was greater competition in the dairy industry
- 50 percent believe the way dairy prices are set is unclear
- 79 percent agree there is a need for a government inquiry into dairy pricing
Report by Jessica Wilson.