Butter prices dipped slightly this month after soaring to record levels in July. The fact a half-kilo costs $5 or more has some locals are changing the way they buy and bake.

Others say they'll absorb the cost and carry on. Why do consumers of one of the world's top milk-producing countries pay a premium for dairy? Can anything be done to change that?

Bay of Plenty Times Weekend reporter Dawn Picken looked for answers about the cost of liquid - and solid - gold.

A weeknight trip to Tauranga's Pak'nSave featured a scene playing out in stores across the country.

Three young men stare at blocks of butter.

Fonterra's Anchor brand is on special: $4.89 for 500 grams; Fonterra's Mainland brand costs $5.99; the store brand, Pam's, is $5.09

"That's expensive," says one of the men. He reaches for a tub of Pam's lite canola oil spread, priced at $1.79.

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Tuesday morning at Mount Maunganui New World, a woman surveys the butter: 500 grams of Mainland is priced at $7.59; the same weight of Rolling Meadow brand (owned by South Island-based Dairyworks) costs $6.39; the Club Deal on Pam's butter is $5.49.

"Outrageous," she mutters. "Ten dollars for a kilo of butter." She grabs a block and moves on.

Experts say butter prices will likely rise again.

World markets for butter and milk fat hit record levels last month, more than twice what they were 12 months ago, according to the Global Dairy Trade market.

Fonterra, the dairy co-operative owned by more than 10,000 New Zealand farmers, is the world's largest exporter of butter and anhydrous milk fat (AMF), shipping out 287,000 tonnes of butter last year worth $1.3 billion.

Ninety per cent of that came from Fonterra factories.

Despite living in a land where cows (6.5 million in 2015, according to Statistics NZ) outnumber people (around 4.6 million), Kiwi consumers are paying higher prices for butter - 49 per cent more comparing June 2017 to June, 2016, according to the NZ Food Price Index.

It states butter reached its highest price since the series began in 1999. The same index shows fresh milk prices rose 7.6 per cent in the year to June 2017; cheese increased 9.3 per cent.

So what gives? Why do we pay a premium for dairy when its source stands just kilometres down the road, chewing its cud?

Experts blame a growing world appetite for full-fat dairy, since Kiwi consumers pay global prices for locally-produced commodities such as milk and butter.

ASB Rural Economist Nathan Penny says butter prices have surged 35 per cent to date in 2017. He likens a 5 per cent price drop during the August 1 global dairy auction to a motor racing pit stop. " ... Pull over, refuel, change tyres and go again. We think butter and milk fat prices can go higher yet."

Penny says butter started gaining popularity following media reports dispelling a decades-old notion butter consumption contributed to heart disease.

The New York Times last October quoted obesity management expert Dr Boris Hansel, who wrote in Medscape even though butter is high in saturated fat, "It should be considered a pleasure food for those who are fond of it, provided that it is consumed in moderate amounts and not consumed in addition to other foods that are high in saturated fatty acids."

Maketu farmer Richard Fowler says he's encouraged by dairy's global surge. Photo/John Borren
Maketu farmer Richard Fowler says he's encouraged by dairy's global surge. Photo/John Borren

Better Days for Bay Farmers

Fonterra late last month increased its forecast price for milk solids to $6.75, up from $6.15 the previous season (2016/17). Local farmers say it's encouraging, following several rough years.

An AgFirst financial survey reports average cash deficit for Waikato/Bay of Plenty dairy farmers for 2015/16 was $100,000. The 2016/17 net deficit was $13,300.

Dairy NZ Bay of Plenty regional leader Sharon Morrell says most local farmers would "be in the positive by now," though they were sidelined last year by cyclones and wet weather. "The milk price is exciting, but everyone has their head down, dealing with day-to-day tasks."

Morrell believes the future for dairy internationally remains very good.

"The challenge that Dairy NZ has is assisting farmers with ensuring they can meet their social and environmental obligations that have come to the fore the past several years while maintaining a sustainable and profitable dairy farm business across all indicators."

Richard Fowler steps between cow pats as he walks among his herd during our photo shoot.

The 36- year-old wears gumboots and asks if we want him to disconnect the electric fence. Photographer John Borren says he'll shoot from the other side. The sun is shining as bovine teeth munch pasture grass.

"They can eat 14 kilograms a day," Fowler says. He milks 640 cows in Maketu and another 400 in Paengeroa.

He says the flow-on effect of the dairy payout means farmers can pay off debt, finish overdue maintenance and prepare for the next market downturn.

"The previous couple of seasons were pretty tough. It's good to get back on our feet again and have some confidence back in the sector."

Overall, Fowler says he's bullish about the future of dairy and says letting the world market set prices makes sense.

"We don't have all these distortions around subsidies ... and I'd hate to lose that. That's the reality of what the product is worth; effectively, the New Zealand public has to pay for that if they don't want to subsidise it."

Critics such as Greenpeace argue taxpayers already prop up dairy farming through irrigation subsidies.

Papamoa farmer Andrew McLeod, who has 400 cows at the end of Domain Rd, agrees domestic consumers should pay global prices.

"When demand is up around the world, we'd be mugs to sell at a lesser price than we can gain for it ... subsidies finished in the 80s, and for the last five years, Fonterra put a price freeze on milk; they held the price of milk back so Kiwis could buy it at a reasonable level."

McLeod says competition is good but so is a single, national co-operative. "It's great to have that big player in the world market because it gives us more power in terms of exports, and a lot of companies in New Zealand ride on the coattails of Fonterra."

Fonterra's Take
Bay of Plenty Times Weekend asked Fonterra spokeswoman Emma Wooster to explain domestic pricing, including why Kiwi customers pay global prices when their milk might travel a short distance.

Wooster says Fonterra sets wholesale, not retail prices, and wrote in an email, "When customers buy their dairy from NZMP (our ingredients business), the transport is factored in separately to the price of the actual product ..."

Kiwi customers make up just 5 per cent of Fonterra's sales.

When asked if the company would consider a domestic price break, Wooster wrote, "It's an interesting idea but would be very difficult to make work. As wholesalers of dairy, any discount we gave wouldn't go direct to the consumer."

Instead, she says the company provides free milk to 1450 schools nationwide; 107 in the Bay of Plenty. "... to make sure it's fair to all our customers, our New Zealand Brands business doesn't get a special discount on the dairy they buy wholesale from NZMP just because of our affiliation."

Legislation requires Fonterra sell up to 5 per cent of total milk produced to competitors.

A Commerce Commission report published last year recommended keeping dairy regulations (the DIRA, or Dairy Industry Restructuring Act of 2001) in place.

"We do not think that competition is sufficient to ensure the efficient and contestable operation of the relevant dairy markets if the DIRA Regulation was removed."

Cooking and Baking
Dairy prices are a touchy subject for some people in the food business, where butter and milk are building blocks of taste and texture.

Bidvest general manager Dean Taylor declined to comment, as did an employee of Sebel Trinity Wharf's restaurant and the manager of Florentine's Bakery. Melba Foods' Tauranga general manager didn't return calls.

Bay chefs who would talk to us say they're loathe to replace butter with cheaper substitutes.

One restaurant chef who could not be named said his operation was paying around $5 per 500 grams, similar to supermarket prices. He said, "butter is everything in the kitchen. The price does interfere and makes it more complicated. We increase prices for customers, as well".

At Lemongrass Catering in Welcome Bay, the aroma of mince wafts from the oven when we visit on a recent weekday.

Owner and chef Belinda Lombard (who also writes a food column for the Bay of Plenty Times) says, "It's for pies."

An employee hoists a heaping tray from the oven, steam rising from baked beef.

Corporate clients keep Lombard busy during winter, when she uses an estimated five kilos of butter per week.

She says her butter use can triple during wedding season. "Butter is king." She doesn't substitute.

"Things always go up and down. When something's out of your control, there's nothing you can do. If you have to take something off the menu, do so, but it's not something we do."

Some home cooks say rising butter prices are changing how often they bake.

Matua's Christine Sadlier wrote on Facebook, "My baking has lessened as butter is so expensive at the mo[ment]."

Belinda Cairns of Papamoa said, "We only eat butter so it won't stop us buying it. It has slowed down my baking though."

Papamoa's Steven Reeves wrote, "Paying export prices for local produce is simply wrong. New Zealanders need to complain more, things are accepted here rather than investigated and pushed back on."

Follow the Chain
Labour Party Primary Industries spokesman Damien O'Connor says he often hears concerns about the overall high cost of food in New Zealand relative to other countries.

Food prices rose at their fastest annual pace in more than six years in the year ended May 31.

But O'Connor says removing GST on some fresh food items (a prior Labour policy) has been scrapped, because there's no guarantee businesses would pass the 15 per cent savings to shoppers.

"We keep a close eye on supermarkets to ensure consumers are getting a fair go and there's no unfair margins on any of the crucial food items."

O'Connor and others say while the cost chain between Fonterra and farmers is fairly transparent, it turns murky when dairy items hit supermarket shelves.

Senior economist at Dairy NZ Matt Newman says a farmer will receive 60 cents per litre of milk produced using the most recent payout figures. That litre is advertised online at Countdown (as of Thursday, August 10) for $2.33 - an increase of 288 per cent.

Dairy NZ regional Leader Sharon Morrell says, "There's a big gap between what a dairy farmer gets paid and what gets charged at the supermarket. And the farmer has very little influence over that."

O'Connor says, "There are still margins in the middle that could be cut by the retail system if it wants to go there. Some smaller retailers have slashed the prices of milk as loss leaders. I think in the area of milk there is real competition, but probably none of those suppliers want to drive the price down further than they have to.

Ultimately, it all relates to the international price of milk and the ability of companies to get more for milk offshore than internally."

DIRA is due for revision, but O'Connor says it's been delayed until after the election, "...for fear of creating a debate within the dairy industry."

Bay of Plenty National MP Todd Muller says New Zealand has enough retail competition to keep pressure on dairy prices. Photo/File
Bay of Plenty National MP Todd Muller says New Zealand has enough retail competition to keep pressure on dairy prices. Photo/File

Bay of Plenty National MP Todd Muller says government has looked at how supermarkets and grocery retail are structured. "... and we're comfortable there's enough competition in there that there's not excessive margin-taking in the supply chain".

"Dairy products get sold in a raft of different formats from little stores to big supermarkets. I think there's sufficient retail competition to keep appropriate pressure on for dairy prices."

Muller says the retail price of milk has remained relatively flat the past decade, even though the global market has been volatile.

Consumer NZ chief executive Sue Chetwin wrote in an email she believes the way Fonterra sets the formula for milk prices, "... has essentially been okay. Where there is no transparency, is with the supermarkets and the mark-ups there for dairy products. Because NZ only has two major supermarket chains (Progressive and Foodstuffs), the industry is ripe for a 'cosy duopoly.' We believe that is what happens".

Cost Comparisons - Major Supermarkets
Earlier this week, we found two litres of store brand standard milk selling for $3.44 at Countdown (online); $3.44 at New World and $3.37 at Pak'nSave. A 500-gram block of store brand butter was priced at $5 at Countdown (online); Pam's butter was on sale at New World for $5.49 and Anchor butter was on special at Pak'nSave for $4.89.

At Coles in Australia, the online price for two litres of store brand milk was AUS$2 (about NZ$2.14), while a 500 gram block of butter cost AUS$4.40 (NZ$4.71).

Australia has no GST on food and sells milk as a loss leader. In the UK, Waitrose.com this week was selling 2.2 litres of whole milk for one pound (NZ$1.76). The UK also has no GST on most food items, but pays farmers subsidies (expected to end after Brexit).

Spokespeople for Progressive Industries (Countdown) and Foodstuffs, (New World and PAaknSave) did not respond directly to queries about dairy mark-ups; using milk as a loss leader; and whether dairy prices drop in tandem with global price declines.

In a written statement, Foodstuffs NZ's Antoinette Laird said the company has seen a gradual but steady increase in unit sales of butter over the last year.

"We work hard across the two Foodstuffs Co-operatives to deliver fair and competitive value to our shoppers, recognising that butter is a staple in many households. It is one of those items which is regularly on promotion. While prices might be slightly up for customers it's good news for our dairy producers - whose increased returns flow back into the community."

Countdown spokesperson Kate Porter wrote not only is global demand for butter high, Kiwis are buying more of it, too, putting additional pressure on local prices.

"New Zealand grocery butter volumes have followed global trends with an increase of 2.5 million units sold across the local retail market over the last five years. We work closely with our suppliers to get the [best] possible price we can for our customers."

Keep Calm and Bake On
Back in her commercial kitchen, chef Belinda Lombard hopes butter prices will ease.

Even if they don't, she says she'll keep making items like lemon cream tartlets, pineapple lump cupcakes and chocolate walnut brownies.

"We just do what needs to be done and we carry on using the products that we like. I'm not prepared to compromise."


Consumer Tips

Tauranga Budget Advisory Service manager Diane Bruin says many of her clients struggle to feed a family of four on $160 per week.

She says recent price hikes for butter make it a luxury item some families can't afford.

"It's a huge big increase. If they're paying that much extra for butter and everything, it has to come from somewhere. I think people's shopping has had to change because of that."

Bruin suggests freezing butter to cut wastage, and using olive oil, which can be swapped for butter in some recipes.

Oilyrag.co.nz has a tip for stretching butter: "... combine warm water and butter in equal parts by putting the butter into a mixer on low speed and slowly adding warm water until thoroughly mixed and smooth. Store it in the usual way - it will get as firm as regular butter".

Even Kiwi cooking stalwart Edmonds.com lists margarine as a butter substitute in recipes for baked goods such as Afghans, gingerbread cupcakes and Black Forest cake.