Should Kiwis be paying so much for butter?

Otago Daily Times

5 hours ago

By Susan Edmunds of RNZ
New Zealanders are paying high prices for milk, butter and cheese because of what people are willing to pay offshore, Fonterra's boss says - but is that fair? Restaurants on a slippery slope due to dairy prices (Subscriber)
The most recent food price data showed milk prices were up 15.1 percent annually last month, to $4.57 per two litres, butter was up 51.2 percent annually to $8.42 per 500g and cheese was up 30.1 percent to $13.04 per kilogram.
In May, Fonterra chief executive Miles Hurrell told RNZ prices were driven by global demand.
"We're a collection of 8500 small farmers and our job is to deliver for each of them," Hurrell said. "The international market is pushing these prices very high at the moment and our job is to reflect that in the returns that we give back to our farmer owners."
University of Auckland economics professor Robert MacCulloch said it was a surprising comment.
"It raised my eyebrows. For a CEO to talk that way, I thought for want of a better word was dumb.
"He's laying down what's known as the law of one price, or purchasing power parity. Similar goods are expected to be priced the same around the world.
"He's saying that applies to dairy and we can sell it anywhere in the world so when the world price goes up, Kiwis pay more and that's the end of the story.
"This is a nice theory, but it's not always true in practice. A lot of goods and services do sell for different prices [in different countries].
"He's saying we don't have any sense of social responsibility at Fonterra, which I thought was ill-judged - even though we're using farm land in the country and we've got the emissions and everything, we're ruthless profit maximisers, all we care about is maximising returns."
He said BMW offered cheaper vehicles to Germans and a similar model could be used for dairy products in New Zealand.
Child Poverty Action Group spokesperson Isaac Gunson said Finance Minister Nicola Wilis had referred in speeches to the fact that New Zealand fed 40 million people "with levels of efficiency and sustainability that are the envy of many".
"At the same time, more than a quarter of our children experienced food insecurity in the year ended June 2024. While we feed the world, our child poverty rates are lagging behind many other countries, especially in Europe.
"When milk powder sells high in Shanghai or Brussels, whānau in Aotearoa pay more for their Weet-Bix and milk - despite the fact we can grow all of the ingredients right here, and get them where they need to go.... It's a system that rewards exporters, but punishes households already doing it tough.
"In a world worried about food security, it is New Zealand children who bear the brunt of that worry - and who are literally paying for it."
But Gareth Kiernan, chief forecaster at Infometrics, said there were only two ways that goods could be sold for a lower price domestically than internationally: By regulating the price or paying subsidies to farmers to make up the difference.
"On its own, this regulation would result in farmers making less product available to the domestic market, potentially leading to shortages. Therefore it is likely that the government would need to also mandate a minimum percentage of product to be sold domestically.
"However, the lower overall return to farmers would be likely to lead to reduced production levels because squeezing out that last drop of milk would not be as profitable."
He said it would also lead to lower GDP and lower incomes per capita for the country as a whole.
Subsidies to farmers would need to be paid for somehow, so more tax would have to be collected.
"If the revenue came from taxing higher-income households, then it is likely that some lower-income households would be better off, but higher-income households would be worse off despite their milk and butter being cheaper.
"With any tax/welfare policy, there is some deadweight loss from the policy due to the administrative costs of government, as well as the less efficient allocation of resources. In this case, the less efficient allocation of resources comes from the consumer side, where people spend more than would be sensible on dairy products because they don't face the full costs."
He compared it to metered or unmetered water.
"If water is metered and people have to pay for their usage, then they will use it more carefully and efficiently, reducing demand and production costs. It means that local councils can then use some of the resources they would have needed to provide water to provide other goods and services instead. In the case of farmers with domestic subsidies, demand for their product would be overinflated, leading to too much of the economy's resources being devoted to farming, when there would be other more productive uses if people faced the full cost of their dairy products and therefore demanded less. Again, the outcome is lower GDP and lower incomes per capita for the country as a whole."
He said there had been "egregious" examples of subsidisation in petrol prices in the Middle East.
Iran, which sells petrol at about US36c a litre, had been dealing with fuel smuggling problems as people tried to get petrol out to neighbouring countries with more expensive prices.
"The difficulty with these arguments is that people see the direct cost or benefit to them in terms of dairy prices, but they don't see the indirect costs of higher taxes and/or lower GDP per capita because the transmission paths are so long and opaque."
Murat Ungor, a senior lecturer in the University of Otago department of economics, agreed if New Zealand detached itself from international pricing, it would undermine the incentive to efficiently produce and export and affect farmer incomes.
"Typically, US butter comprises 80 percent butterfat, while European and New Zealand products offer a higher 82 percent content. This variance not only influences pricing structures but also shapes trade opportunities. European and Kiwi butter, with their richer content, cater more readily to international markets demanding premium quality.
"Domestic consumers compete with international buyers, meaning local prices are influenced by global market rates rather than just local production costs. NZ dairy processors sell at international market rates, leaving little incentive to discount locally. Fonterra's dominance and supermarket duopoly reduce pressure to lower retail prices."