KEY POINTS:
People are swapping cheese brands and trading down as dairy prices soar, and there's no certainty when shoppers will get some relief.
The price of a 1kg block of mild cheese has risen 60 per cent in the past year, and now costs an eye-watering $10.54.
Butter has risen even more, up 92 per cent to $3.83 for a 500g block of unsalted. A standard 2-litre bottle of milk is up 23 per cent on the previous year, now costing $3.25.
Fonterra Brands New Zealand managing director Peter McClure said the high prices had seen demand for butter and cheese in the quarter ending February drop 10 per cent, and he would not be surprised to see it fall further.
Rob Chemaly, general manager of strategy and new ventures for Foodstuffs Auckland which operates the Pak'nSave supermarkets, said there had not been a massive drop in cheese sales but shoppers were trading to smaller blocks and between brands.
"We regard ourselves as a buying agent for the consumer so we negotiate really hard when suppliers come to us with a price increase," Chemaly said.
"Our attitude quite fairly and squarely is that we won't allow any market share erosion whatsoever."
But grocery items historically had low margins and Foodstuffs could not absorb increases, he said.
"It's not a case of us creeping our margins in any respect, it's just a case of us reflecting the price increases that come through to us."
Fonterra's McClure believed dairy prices had topped out.
"Hopefully we'll see some easing over the next six months," he said. "It's in our interest to flow that back to the consumer because if our markets are contracting it's not a good thing."
International dairy commodity prices have boomed on the back of reduced supply, drought in Australia, biofuel production driving up the costs of feedstock, world economic growth and demand from emerging markets.
The ANZ Commodity Price Index for dairy products rose for 15 consecutive months and more than doubled from 127.6 in August, 2006, to 291.9 in November.
Statistics New Zealand figures show New Zealand's export of milk powder, butter and cheese in the three months ended February was up 67 per cent on the previous year at $2.96 billion, with the value of exports in February alone up 72 per cent on a volume rise of only 1.1 per cent.
Independent cheese maker Open Country Cheese says Kiwi consumers are paying the price for Fonterra's monopolistic control of 95 per cent of milk supply.
The Waikato company says dairy ingredients are only a small proportion of total cost.
"For instance, if the cost of dairy ingredients doubled from 12 months ago, a retail price increase of no more than 25 per cent would recover fully the extra cost of dairy ingredients whereas the NZ consumer has had to face price rises of up to 100 per cent," Open Country said in a release.
"It is truly alarming when you compare the actual level of price rises that has been forced on the New Zealand consumer with the actual cost increases experienced by Fonterra for their raw material. That comparison shows clear evidence of price gouging."
Westpac economist Doug Steel said it was not possible to examine one cost in isolation.
"Certainly you've had very strong wage increases as well, you've had very strong increases in transport costs. Most costs have been going up especially for those costs that are relevant to the processing of dairy products, like a lot of electricity to dry the milk."
Commodity prices had recently declined but it was hard to say how far they might eventually fall. However, historical trends for food price booms show a median reduction of about 50 per cent.
Skimmed milk powder had been coming off sharply in the past six months, whole milk powder had dropped by a lesser amount, butter was fairly flat and cheese had just started to dip, Steel said.
On the other hand, petro-economies were taking about 25 per cent of New Zealand's dairy production and high oil prices could well lead to higher dairy product prices because of demand from oil exporting nations.
And local consumers were unlikely to see any drop in shelf prices this year, with retail prices tending to follow international prices with a lag of about eight months.
"They could go up because there could well be more flow through from the international prices that hasn't come through yet" Steel said.
Fonterra manufactures most of the butter and the pre-cut and wrapped bulk cheese in New Zealand.
At the cut and wrap stage - when specific products are packaged - Fonterra Brands had about 40 per cent of the market, with brands including Mainland, Valumetric and private label products for Progressive Enterprises, McClure said.
Despite the fact the wider Fonterra company manufactured most bulk cheese the brands division still had to pay the market rate.
"If it was Fonterra making it or any other dairy company making it they're going to sell at the international commodity prices," he said.
The core Fonterra company which sold commodities offshore was required by law to supply its own brands division on an arm's length basis.
"There's regulations around milk price and what they have to supply various companies at and so they have to treat us as a customer just as they do their overseas customers," McClure said. "While [for] consumers it's easy to be a bit cynical about the fact that we're all part of one company, unless I pay the same input price I just don't get it, they'll sell it elsewhere."
Other cut and wrap cheese manufacturers had to negotiate contracts with Fonterra.
"I really can't comment on what other parties buy it at but what frustrates me is I often see small companies ... undercutting me in the market," McClure said. "Given I don't make fat margins they must be buying from Fonterra pretty well."
Fonterra Brands had recovered increased costs in the cheese and butter segments, although margin percentages were down and the division had not recovered the costs when it came to milk, he said.
Shoppers seemed to have more of an issue with the price of dairy than other products, he said.
"The same people go out and spend $20 to buy a kilogram of snapper ... and they understand absolutely that it's about supply and demand and what the international market is dictating."
