Dairy prices have slumped, so why is butter still expensive?

Butter prices are still high despite falls in Global Dairy Trade prices. Photo / NZME

The price of butter has slumped by just under US$2000 a tonne on the Global Dairy Trade (GDT) platform since March, so why is it still expensive in the shops?

Consumers can pay up to $8.30 for a 500g pack of Tararua branded butter, although many supermarkets are discounting the product to get shoppers in through the doors.

Dairy prices have continued to slide at the latest GDT auction, which may put Fonterra's very high farmgate milk price under pressure.

At the auction, butter prices fell 6.1 per cent to US$5194 per tonne, down US$1892 or 26.7 per cent from their March peak.

Whole milk powder, which has the biggest influence on Fonterra's farmgate milk price — slipped 6.1 per cent, following a 5.1 per cent decline in the previous event, to an average US$3544/tonne.

Fonterra's second-biggest reference product — skim milk powder — fell 5.3 per cent to US$3524/tonne, after plunging 8.6 per cent at the previous sale.

Westpac senior agri economist Nathan Penny said local retail product prices reflect the milk price, and not the price paid on the auction platform.

"So if Fonterra revises down its milk price forecasts, then you will see it flow through into local prices.

"Effectively, whoever is producing butter — they are paying the milk price for the raw milk."

When the milk price does fall, it can take six to 12 months to show up in retail prices, he says.

Penny said however there was a possibility that Fonterra may cut its $9.50/kg forecast.

In the retail price, many factors come into play, such as wage and transport costs.

"To get a 30 per cent drop in butter prices you would need to see a 30 per cent drop in all those other components, would have to fall by the same amount, and we are not seeing that," he said.

Economists are generally keeping to their milk price forecasts, despite the slump in GDT prices, because of the lower production in New Zealand, Europe and the United States.

Penny said production from the big three was the worst he had seen, but that he was confident of a price rebound.

"At the moment demand is the focus but when China comes out of lockdown, restrictions ease, and its economy rebounds, and you put that together with very weak global production, we are very likely to see prices rebound in a few months' time," he said.

In the meantime, ongoing dairy auction price falls continue to highlight weakening global dairy demand.

Prices have effectively been on the wane since March.

Over that time, whole milk powder prices have plunged 30 per cent, while overall prices are down 27 per cent.

As in previous auctions, Fonterra increased the amount of product on offer on the auction platform.

"This move suggests that previously contracted sales have now fallen through as buyers have either been able to point to lower prices elsewhere or simply that they don't have the consumer demand to justify the earlier sales contracts," Penny said.

"That's seen product pushed back into the marketplace."

Fonterra, in its latest global update, said New Zealand milk production for the 12 months to June was down 4.3 per cent on the year prior.

New Zealand dairy exports were down 15.0 per cent in June compared to the same period the year prior, driven by lower shipments to China of whole milk powder and cheese as covid lockdowns restrictions continue to impact demand.

Whole milk powder exports to United Arab Emirates and Sri Lanka also declined, year-on-year, it said.

Dairy is not the only New Zealand commodity to suffer from weak prices.

The ANZ's World Commodity Price Index fell 2.2 per cent in July, with prices easing across the majority of export sectors.

However, the bank said the relatively soft NZ dollar continued to support returns, the index falling just 0.5 per cent in local currency terms.