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Chart o’ the day: got milked?

Written By: - Date published: 9:23 am, August 10th, 2011 - 40 comments
Categories: cost of living, food - Tags: , ,

International price on the left, from here. Domestic on right, from here.

Can’t help but notice the international price peaked just when Fonterra put on their ‘generous price-cap’tm.

40 comments on “Chart o’ the day: got milked? ”

  1. Lanthanide 1

    For all Fonterra goes on about how they set the milk price according to the “international price”, it’s pretty clear that they do not.

    Or, they are using a fixed formula which says $1NZ = US$0.60, which hasn’t been the case for quite a long time now. While it’s unrealistic that they track the daily exchange rate, I think a reasonable lower level of resolution would be using a the previous quarter’s average exchange rate to set the price.

    • Draco T Bastard 1.1

      While it’s unrealistic that they track the daily exchange rate…

      That’s not unrealistic at all. This MS Gadget I’ve got on my desktop updates every 15 minutes and it’s free and I’m pretty sure that there’ll be any number of online sites, like this one, that tracks the exchange rate and/or makes the numbers available in machine readable format so that they can track it themselves in real time.

      Of course, if they just charged NZ$ for their products instead of US$ then they wouldn’t need to worry about the exchange rate. Hell, that’s the whole point of a floating currency.

      • Lanthanide 1.1.1

        It’s unrealistic for them to change the price they are selling their product to supermarkets at on a daily basis.

        • Blighty

          I don’t think they’re being asked to change on a daily basis. It’s been 5 months since international dairy prices peaked and retail prices haven’t budged.

        • Draco T Bastard

          It’s not that either. Prices in the wholesale market should, and probably do, change on a minute to minute basis. As such, Fontera shouldn’t be fixing the price at all and the price on the international wholesale market should be in NZ$ not US$.

          What makes prices in the retail sector sticky is a little harder to define but part of it could be that the supermarkets may be buying for a length of time (X amount over Y weeks) or for a specific time period in the future (X amount delivered on Y date) or some combination of the two. Prices are sticky anyway as people are creatures of habit – they get used to paying X amount and don’t really question it (Asymmetric information) and then there’s the fixed costs which aren’t going down while actual sales volume is which means that the price per unit will have to go up.

        • Colonial Viper

          It’s unrealistic for them to change the price they are selling their product to supermarkets at on a daily basis.

          In an age of computers and electronic invoicing…uh, why not??? There doesn’t even need to be any human input to doing this!

    • Blighty 1.2

      It’s not just the exchange rate, or even mostly the exchange rate. The fall in international dairy prices has been mostly a fall in the US$ price, with the rising exchange rate just adding to it.

    • freedom 1.3

      Petrol manges to shift its price on a regular basis and deals with a lot more processing than liquid milk. Dairy in NZ is a rort and is hurting the health and wellbeing of families . Profit rules and Fonterra has gotten so large the domestic NZ market is a fraction of their interest, and that interest waned a long long time ago.

      • Lanthanide 1.3.1

        Petrol is a bit different, though, because many petrol stations have electronic signs or are used to changing their price frequently. It also doesn’t tend to change from day to day, but generally stays constant for weeks or sometimes months without changes.

        Another thing is that the way petrol is retailed, it’s essentially a fungible commodity. When the oil price goes up and the petrol company puts the price up in the stations, it’s not because the petrol that the stations are pumping today is suddenly more expensive – it’s that the petrol company needs to buy more supply today in order to sell it next month. Milk isn’t quite the same – an international price rise today shouldn’t be reflected in milk that is on the shelves today.

        Changing the price of milk sold to supermarkets on a daily basis would result in supermarkets having to change the price on their shelf daily. Or, they could keep the shelf price the same and just eat or gain from fluctuations in their margin. In which case you wouldn’t have actually achieved anything.

  2. Craig Glen Eden 2

    Yeah whats clear is the international price has been used as an excuse to justify a shift in pricing, as has been pointed out a average price needs to be set over a period of time, you cant change the price each afternoon or weekly that would be silly.But milk is being used by some retailers as a bit of a cash cow pun intended.

  3. felix 3

    Goes up ok, dunnit?

    • freedom 3.1

      i aspire to buy milk once a week and i have a loan application in for a nice slice of Brie i spotted the other day. Not sure about the bread to put it on but one dream at a time.

  4. jenn 4

    There is a lot more to the end cost than just the international prices though, isn’t there? As people have mentioned above, exchange rate plays a significant part (and I’d be extremely surprised if they aren’t forecasting/locking in exchange rates in advance, rather than allowing themselves to be totally dependent on the frequent fluctuations in exchange rates). The dairy auctions run in USD, most of Fonterra operates in NZD, which means this exchange rate is bound to be hugely influential.

    The retail price is also dependent on supermarkets/retailers and the margins they place on the milk; transport costs, and the petrol cost etc. etc.

    I think it’s very simplistic to draw the conclusion from this graph that Fonterra must be ripping us all off…

    Tell you what, if you have such an issue with Fonterra, boycott their brands of milk and dairy products. I’m pretty sure that if everyone stopped buying them, they’d lower their price…

    • Richard 4.1

      there is, but Fonterra swears black and blue, that the cost of milk in NZ is ‘governed by the international price of milk’ every time someone asks them about why it costs so much.

      • jenn 4.1.1

        It is raised, yes, but I don’t know that Fonterra say that it’s the be all and end all.
        I was watching Andrew Ferrier on Q+A on Sunday morning, and thought he did a good job of explaining it in a way that makes sense.  In basic terms, the retail milk price is built up from a price model that uses the results from Dairy Trade as a base.  There are other factors that feed into the model (including exchange rates etc.). 

        From voxy.co.nz‘s summary of the intervivew
        “Known per litre milk costs are roughly: 65c to farmer, 25c to Fonterra, 30c to GST, coming to $1.20. One litre of milk in supermarket costs $2.19. So where’s the Missing Dollar? Ferrier puts it down to bottling, transportation, plus supermarket costs and margin.”

        So, the statement that they are governed by international prices is true, but is not the whole story. 

        • insider

          Umm $2.19 is a very high number for milk. It is often 30 to 40 cents cheaper in my supermarket. So there’s a large chunk of the so called missing dollar gone already.

          • felix

            It’s over $3 for a litre at the servo up the road from me, not that I’d ever buy it there.

            The range of prices is staggering considering that (specialties aside) it’s all the same milk.

            • jenn

              There are price ranges and variation in any product though. Customers choose to pay for different value propositions.

              e.g. the tinned tomatoes in the super market are essentially the same, yet I pay 89c for Home Brand, compared to $2.20 for Watties (that was the price last time I looked anyway). Some people choose Watties, because they trust the brand or whatever; some people find price more important and choose Home Brand. If no one bought the Watties product, they would reduce the price to increase sales. If that was not a possibility, they’d go out of business (simplistically, anyway…)

              And I could give you any number of other similar situations…

            • James

              It’s not the same milk. Fonterra’s brand of full-cream milk at my supermarket was pre-agitated into butter, until we all stopped buying it and the supermarket stopped selling it.

              The supermarket explained to me that they couldn’t explain to Fonterra that this was a product fault, because it didn’t show up on the computerised temperature logger.

              • felix

                Yes I realise there are different brands marketed by different companies, but the chap from Fonterra the other week said that the various branded containers all contain the exact same milk.

  5. KJT 5

    Milk, Timber, meat.

    Why are we paying more than for the same product overseas.

    If NZ producers are so f– king efficient, as they claim, why are we subsidising them with tax exemptions, cheap labour AND higher local prices.

    I suspect we would get a much greater return if, like real economies, we put our money into high end, low volume, high tech manufacturing instead of trying to make life easy for farmers. Who still rattle on about being the backbone of the country, when we make more on manufacturing and tourism.

  6. ghostwhowalksnz 6

    When its made here we have to pay the international price but not when it drops- Fonterra

    When its made overseas we pay whatever they can get away with- Adidas

    • KJT 6.1

      Most countries where stuff is made locally pay lower prices for the local produce.

      Running shoes and cars in Korea.

      Grain in the USA.

      Petrol in the Gulf States.

      Watches and pocket knives in Switzerland.

      BMW’s in Germany.

      Computers in China.

      Only here do our exporters have to be subsidised by higher local prices than they sell for offshore.

      • Lanthanide 6.1.1

        Petrol is subsidised by the governments in the gulf states. So it’s not really the same as the other things you’ve listed.

        Actually grains and farm production is (heavily) subsidised by the US government too, hence why they have high fructose corn syrup…

  7. millsy 7

    It seems to be that the best solution would be for Fonterra to open its own retail stores and sell at wholesale prices.

    I think the smaller co-ops (ie Moa-nui, Egmont, Okato, etc) used to do this before they were swallowed into Kiwi Dairies and then Fonterra.

  8. Ianmac from turkey 8

    And wot about the price of bottled water? Clean water everywhere in NZ yet costs $3 or $4 a litre. In Turkey 1Lira (70 cents nz) for 1.5 litres.

  9. grumpy 9

    Hi Ian Mac,

    Funny last time I was in Turkey (a while ago now) water cost hundreds of thousands…….

  10. vto 10

    Well just like the All Backs rugby jersey and adidas, we should simply buy our milk overseas (whether it comes form fonterra or some other foreign producer who the hell cares? It is not as if the milk production industry in NZ cares about us).

    I’m sure it would not be too hard to import. Might get me on the phone tomorrow.

    • fabregas4 10.1

      Probably be cheaper to buy exported kiwi milk in China and bring it back here for sale.

      Re the missing dollar – I can get that this gets eaten up in transport costs/profit for supermarket etc but can’t get that we can export the stuff and then it is cheaper overseas. A leg of lamb being the best example $40-$50 here – 8-16 pounds in the UK? I’d love to know how this works.

      Auckland riots anyone? Loot a few steaks and a couple of litres of milk? Is it ok to steal when you have no bread and/or milk?

      • KJT 10.1.1

        Actually considering doing it for a business.

        Buying New Zealand building materials in Australia. Making house kitsets and selling them in New Zealand.

        Despite higher wages and the shipping costs, the building materials are so much cheaper, it looks like it could be a viable business.

        Wait. China already does it. Processes NZ raw materials and sells them back to us.

        • insider

          builders I know tell me they can get interior wall cladding very cheaply from overseas sources but their local near monopoly suppliers of materials ‘remind’ them of the trade discounts they get on their other goods, which ‘encourages’ them to stay loyal to the local product.

          • vto

            Who here is an importer? Need someone who can quickly ascertain what the price of milk would be if imported from foreign moo cows..

            • freedom

              have to be careful on that one VTO as there is wide use of reconstituted milk, or toned milk, in many foreign markets including India and China, so it may result in false economy. We have regs that don’t allow that practice for human consumption here. Although that being said, i have bought budget milk that behaves very oddly when heated that certainly appears to have been reconstituted from powder. My only proof being its remarkable similarity when heating the milk i reconstitute from powder.

  11. Marjorie Dawe 11

    You might be put on a convict ship and sent to the colonies if you steal for milk and bread. Oh thats right we have moved on from that. NOT!!

  12. Marjorie Dawe 12

    I do wonder if a lot of the price being charged in the supermarkets is their profit because the dairies seem to sell milk for a heck of a lot cheaper. I buy 4 litres for $5.50 in Penrose Rd, Mt Wellington. I’m not sure if this is Fonterra milk though.

  13. Jimmy 13

    This whole topic, is a little boring and over done, the price of milk!!!
    Their are many other products that have risen in price as much as milk if not more, yet this is the focus for political NZ!!
    Come on surely the thinking voters of NZ have more to worry about than paying $5 or $6 for 4 litres of milk, which in my opinion is probably not a terrible price for that particular product.
    Comparisons with fizzy drinlks, petrol and bottled water are just stupid and they should be left with the stupid to ponder.
    And like it or not, admit it or not, I think we all deep down realize Fonterra is one of the best NZ companys we have that compete in the world market, and fairly well respected globally as far as I can tell.

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