It is something that often puzzles people from outside New Zealand: in a country with close to five million dairy cows, why do dairy products seem so expensive?
The question is once again top of mind, with the price of butter on the lips of our politicians.
Butter prices have almost doubled in the past 14 months, the average 500g block soaring from $4.49 in April last year to $8.60 now. For comparison’s sake, in January 2015 the same block cost $2.97.
With Finance Minister Nicola Willis meeting with Fonterra’s chief executive to quiz the diary giant, the Herald asked experts about what goes into the cost of New Zealand’s liquid gold.
To paraphrase former US President Bill Clinton: it’s the economics, stupid.
One big factor behind the rise, according to economists, is that New Zealand exports wholesale butter products and the price for this has soared internationally.
As Infometrics economist and chief forecaster Gareth Kiernan explained, a 74% rise in international butter prices at Fonterra’s Global Dairy Trade auctions between August 2023 and May this year has “directly flowed through into retail prices within New Zealand”.
What’s behind that jump?
Kiernan explains it “reflects a mixture of demand and supply factors, including lower dairy production volumes in the US, Europe, South America, and China” as well as “a sharp drop in Australian [dairy] production between 2021 and 2023 that has not been fully recovered from; and strong demand growth in Asia”.
“Weather events, including both drought and periods of excessive rainfall, have been a contributing factor to many of the supply issues overseas. However, tougher environmental regulations, higher energy prices, and a bluetongue virus outbreak in late 2024 have also negatively affected European dairy production,” Kiernan added.
So a reduction in global supply, together with stronger demand, has pumped up the prices.
Michael Harvey, senior analyst in dairy and consumer foods for Rabobank, makes similar points and highlights the rise in the cost of dairy products that New Zealand exports.
“It’s across all channels,” he told the Herald. “And it ultimately comes down to global prices”.
The reality is that New Zealand exports 98% of the dairy products it produces, Harvey says, and the country has a very large and very successful dairy industry. Because we export so much, our local prices are heavily affected by the demand in those export markets. In a sense, we are paying the price of our own success.
This morning, David Seymour told Herald NOW’s Ryan Bridge that high butter prices are actually really good news for the economy, and we should all be happy about the money flowing into farmers’ pockets.
Yes, Kiernan says. “They are undoubtedly painful for consumers, but they mean that dairy farmers’ incomes are increasing, which will help drive New Zealand’s economic recovery over the next 18 months,” he adds.
“Low dairy prices (along with high costs) during 2022 and 2023 led to a pull-back in farm spending, hurting economic activity in provincial areas. Improving incomes will see more spending on farm supplies, equipment, and machinery, boosting economic activity and jobs in provincial areas.”
Kiernan goes further and says that rising dairy prices are more important to the country’s economic recovery than lower interest rates: “In our view, the lift in dairy prices, along with rising meat prices and high horticulture prices, is shaping as an even more important component of the economy’s recovery than declining interest rates”.
Consumer NZ, however, said Seymour “missed the point” with his statement.
“Our research this month has found that 70% of New Zealanders rank the cost of food and groceries as a top three financial concern.
“Most New Zealanders don’t believe the Government is doing enough to keep food affordable – two-thirds of people said they have low confidence in current government policies.”
They said the conversation about butter prices “overshadows” the wider issue – prices are becoming unsustainable for more and more New Zealanders.
“Of course, we should be focused on growing a high-wage economy to roll with global price spikes – but when this is contrasted with an increasing number of people who are struggling to pay for the basics, we question at what cost?”
Let’s start with the good(ish) news for consumers: international butter prices have been stabilising over the past couple of months.
“There are expectations of improving supply conditions in Europe, in particular, that should help to alleviate some of the current mismatch between supply and demand. Growth in Chinese demand is likely to remain reasonably modest over the next 18 months, also helping to provide some relief in prices,” Kiernan says.
The not-so-good news: The latest OECD/FAO forecasts show only an 8% correction in prices between 2024 and 2026, which means there is no immediate relief on the horizon, as this will still leave butter prices higher than people were used to a few years ago.
The reason behind this, Kiernan says, is “further growth in demand from India, Pakistan, the Middle East, and North Africa, which is expected to remain reasonably strong”.
So the bad news for bakers, cakers and scone-makers: not only are butter prices not about to drop any time soon, they may actually go even higher.
“The full effects of international butter price rises through to May have probably not quite flowed through into retail butter prices in NZ yet, so there is still a near-term risk that retail prices could push a bit higher,” Infometrics’ chief forecaster says.
“Because we have yet to see any dip in international prices, it’s too early to be certain about the timing of any reversal in retail prices, so it might not be until late 2025 or early 2026 that supermarket butter prices start to ease a little from current highs.”
Rabobank’s Harvey agrees: “We are not expecting the global price to rapidly decline in the next six to 12 months, but there’ll be some pressure. Relief is on the horizon, but there won’t be a dramatic decline”.
If you look at the Global Dairy Trade (GDT) as a global indicator of prices, these have fallen marginally in recent months, but are still very high, Harvey explains.
“It becomes a question of when we will see some correction,” he adds.
How that correction will happen also depends on several factors. “It could be that customers just stop buying, because the price is too high, or a supplier response from manufacturers. You’ll get a balance of that,” Harvey says.
The question, Harvey says, gets complex when we try to do price comparisons across different geographies. “There’s nuance around the retail structure in each market and there’s variability in the category itself,” he says, adding that there are “excluding mechanisms” that could be at play. For example, some retailers could be buying on contract for a period of time, thus locking into a certain price for longer.
“You’re never going to get them all to line up and agree on a price, but the reality is consumers in all geographies are paying more for butter.”
Rabobank’s Harvey says products like cocoa and coffee beans are “commodities to watch” because, among other factors, there are current shortages that could affect pricing.
Canola oil is going through a similar cycle, he says.
Not much, apparently.
Willis met with Fonterra chief Miles Hurrell this afternoon about the dairy giant’s pricing model.
As a result, Hurrell will publicly explain the different components of the price of butter, which Willis said will come later in the week.
Willis did say the Fonterra CEO blamed supermarkets for prices being quite as high as they are.
When asked whether anything raised in the meeting would lead to lower prices, Willis said, “All roads lead back to supermarket competition.
“What Miles acknowledged, and what every New Zealander can see, is that supermarkets make choices about what margin they charge for butter. Now this is at the margin, it is a small proportion of the overall price that you pay, between 5% and 10% of the overall price shared between Fonterra and the retailer.
“What is clear is that different retailers make different decisions about what margins they charge,” Willis said.
Speaking to the Herald before the meeting, Harvey said there’s “not much the Government can do” in the short term as the Beehive is largely unable to influence global pricing.
There are some players along the supply chain who can have an impact, though. “Retailers will look to trade down where they can. They are very mindful of this,” Harvey says, adding that we should expect to see more “promotional activity” that customers can take advantage of.
Butter is expensive right now, but it’s probably going to get worse before it gets better – and there isn’t much anyone can do about it. That’s good if you sell butter (or the raw ingredients used in production). For those who buy it as part of their weekly shop, it’s something that’s a lot harder to swallow.