KEY POINTS:
As John Bluett takes stock of his 950 cows on verdant Waikato pasture, he's acutely aware of his place in the international dairy supply chain.
For every litre of milk that leaves his farm gate at Te Pahu, southwest of Hamilton, he receives about 60 cents.
The processes
that convert that litre into the $1.80 or so which consumers pay at the supermarket, or the $8 or $9 wholesale price on a kilo of cheddar, are beyond his control - but he's worried about where things are heading.
Fuel costs and rising electricity charges are adding costs on the farm, along the production line and in freighting products to markets.
But the price paid by New Zealand consumers is set largely by international spot prices for dairy products - and they've been going through the roof.
International demand is soaring, particularly in China and India, where economic growth of around 8 to 9 per cent is creating middle classes from the poor. As incomes rise, people are improving their diets to include calcium-rich milk and high-protein cheese products.
"In places like China they've gone straight for the high-priced stuff," says Bluett.
The international price for dairy products is set in US dollars, so the weaker US currency "means a country like Hong Kong can afford to pay more".
A quarter of our dairy exports go to petro-economies where consumers also have more to spend as the price of oil soars.
"The world market is growing at 2 to 3 per cent a year - enough to take New Zealand's total production."
In most other dairying countries, cows eat grain feeds, rather than grass in a pasture. Increased demand for grain from emerging economies and the diversion of land used for food crops to biofuel crops in the United States, Europe and Asia has pushed up the price of these feeds - making end products more expensive while giving New Zealand a competitive advantage.
In the past, says Bluett, soya bean protein acted as a handbrake on dairy prices - at a certain level, producers using dairy protein as a raw material would switch to soy. But with soya beans being crushed for biofuels, dairy prices have risen unchecked.
Initially, countries softened the impact of cost rises by using butter and milk powder stockpiles - but by the middle of last year those cupboards were emptied.
The supply and demand squeeze has lifted Fonterra's payout per kilo of milk solids from $4.46 in 2006/07 to a forecast $7.30 this year. It may go higher.
That's undoubtedly good for New Zealand as farmers invest in their farms and the benefits flow to local businesses and employees.
Bluett, like most local dairy farmers, is sensitive to the perception that they are creaming it.
But this year's boom follows several tight years and on-farm costs are soaring, he says.
Electricity, fuel and maize silage prices have gone up, and the cost of fertiliser is expected to double.
He says increased on-farm costs have added $1 a kilo of milk solids to production costs. And the past summer's drought limited milk production, reducing the effect of the forecast $7.30 payout.
Because of the drought, Bluett has shelved expansion plans which would have boosted profitability and put more money into the Waikato economy.
But of far greater significance than the dairy price boom's effect on New Zealand consumers, he says, are looming world food shortages as food crops are diverted for biofuels.
The price rises affecting dairy products are about to spread to bread, cereals and other staples.
"After World War I and World War II, most countries wanted to grow their own food and they used subsidies to protect local markets. Now they're wanting certainty of fuel supplies.
"The US won't have grain surpluses to give to aid agencies - that's more of a worry than the price of cheese we pay in the supermarket or what the upper classes pay for food worldwide. A lot of people are going to starve."
