Explainer: New Zealand Dairy Prices
The price consumers in New Zealand pay for dairy products is influenced by global dairy commodity prices and the cost of making the finished products.
Global dairy commodity prices are used in the methodology to calculate the amount Fonterra Cooperative Group (Fonterra) pays its shareholding farmers for their milk. This is called the Farmgate Milk Price.
If there are consistent rises in global dairy commodity prices this will lead to an increase in the wholesale price of products like butter and cheese. It will also result in an increase to the Farmgate Milk Price and, in turn, the wholesale price of liquid milk.
Fonterra’s customers, including Fonterra’s own consumer brands business Fonterra Brands New Zealand (FBNZ), buy both commodity dairy products and wholesale milk from Fonterra required to manufacture their consumer products.
If the wholesale milk price and dairy commodity prices increase, they may eventually push up the price of dairy products that are sold by suppliers (such as FBNZ) to supermarkets, local dairies and other retailers around New Zealand.
The way Fonterra calculates the Farmgate Milk Price is regulated under the Dairy Industry Restructuring Act (DIRA) which was introduced in 2001, and subsequently amended.
DIRA provides a framework to regulate certain activities of Fonterra, including monitoring the Co-operative’s Farmgate Milk Price setting processes. Under DIRA Fonterra must:
appoint a milk price panel
maintain a milk price manual
calculate the price of milk for each milk season using the manual
Each year at the end of the milking season, the milk price manual and milk price calculation are reviewed by the Commerce Commission, which is New Zealand’s competition and consumer regulator.
Fonterra turns farmers’ milk into a variety of products of which about 95% are shipped to overseas markets, given New Zealand’s small population size relative to the amount of dairy products the country produces. These products are processed and sold by Fonterra through three separate channels: Consumer, Foodservice and Ingredients.
In New Zealand, Fonterra must make a certain volume of raw milk it collects each season available to eligible independent dairy processors at a regulated price set by the Dairy Industry Restructuring (Raw Milk) Regulations 2012. Fonterra also sells raw milk on commercial terms to a number of food companies including FBNZ.
Like other consumer food suppliers, FBNZ must manage its input costs to survive and grow. If the price it pays for wholesale milk and dairy commodities consistently rises, the business would need to make a commercial decision as to how much of this input cost increase would be passed on to its customers. Likewise, it would need to consider any other input cost rises, such as labour, packaging, energy, manufacturing, storage and distribution costs, when setting its prices for dairy products. In times of high inflation, like we are currently experiencing, these input costs increase more quickly than usual and are reflected in FBNZ’s wholesale prices.
Supermarkets and other retailers who buy the consumer format products from suppliers such as FBNZ then set the retail price in their discretion, which is the amount consumers pay for the goods.