Inside Economics: Butter prices are falling - just not for you (yet), plus US Fed fallout and signs of a local retail recovery

Butter prices are forecast to soften on the GlobalDairyTrade platform overnight. Photo / 123RF

Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for my weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.

Butter prices are on the way down

Here’s some good news for this mad nation of butter addicts. Butter prices are falling.

The price has dropped at each of the last four fortnightly Global Dairy Trade auctions.

In fact, the international commodity price for butter is now down 10.6% from its peak back in May.

The bad news is that they haven’t fallen at the supermarket yet. But they will eventually.

It can take anywhere from two to six months for commodity prices to flow through to the retailer, depending on how much forward buying they do and how much stock they are holding.

Also, given the media storm about butter pricing, I suspect that the major supermarket chains have cut their margins wafer-thin.

So I’d be surprised to see them hurrying to cut prices, especially for their house brand blocks, which are being held at a price point below $9.

Still, the turn on international markets should be heartening for consumers.

It is a reminder that with a commodity like butter, you are not doomed to pay the peak price forever.

It’s much the same as the way petrol prices didn’t stay at the $3 a litre peak they hit in 2021.

Goods traded on international commodity markets invariably roll through big cycles.

They self-correct. When prices climb too high, we see demand shift away from expensive products and towards alternatives.

So demand for butter falls because there are alternatives (even if they aren’t quite as delicious and creamy).

High prices also encourage producers to cash in by making more of a particular product, and this can increase supply just as demand starts falling.

That’s why those who follow commodities are wary of big price spikes, which are often followed by slumps.

The good news for dairy farmers (and the rest of the New Zealand economy) is that while butter prices are down, whole milk powder prices remain high.

Whole milk powder – which has the biggest impact on Fonterra’s farmgate milk price – recorded a slight 0.3% rise at the last auction.

Long may this run continue. Fonterra last week upgraded its farmgate milk price forecast for the 2024-25 season to $10.15 per kg of milksolids from $10.00/kg.

It also narrowed its forecast range for the 2025-26 season from $8.00-$11.00 per kgMS to $9.00-$11.00 per kgMS.

Bittersweet

As well as the extra $10 billion or so more that dairy farmers are expected to bring in over the next two seasons, due to elevated commodity prices, Fonterra farmers are looking at a $3.2b windfall with the sale of the consumer business to French dairy giant Lactalis.

This is a great deal for farmers, at the upper end of the price range that was expected, according to Fonterra.

I’m thrilled the process went well. But it is a little sad for NZ Inc.

I’ve followed Fonterra’s progress closely since it was formed.

Cracking the consumer market with a global dairy brand to rival the likes of Nestle and Kraft was always the holy grail for the co-operative.

Over the past 25 years, it has had some branding successes, but it has never quite delivered the level of profit required to justify the resources invested and risks being taken.

I realise that NZ Inc is only a hypothetical concept, but it does still feel a shame that even if Fonterra wanted out, there was no way to keep it New Zealand-owned – either through an NZX float or a syndicate of local investors.

You can bet that in Australia, Singapore or Norway, a local investment syndicate would have fought to keep an asset like that.

It seems that New Zealand’s capital market just isn’t deep enough to handle the risk profile of a fast-moving consumer goods company.

So another great home-grown business heads offshore, leaving us to ponder what might have been if New Zealanders had higher rates of saving and investment in capital markets and didn’t have so much wealth tied up in housing.

A butterfly flaps its wings ...

On the other side of the world, a central banker gives a speech and all of our KiwiSaver funds get a boost.

“With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” US Federal Reserve chair Jerome Powell said at the annual central bank summit in Jackson Hole, Wyoming, last weekend.

Those few words sent a collective sigh of relief around Wall Street and pushed US markets to fresh record highs.

Odds are they took your KiwiSaver account along for the ride.

Powell has signalled that a US rate cut is on the cards in September, despite the Fed’s ongoing concerns about what Donald Trump’s tariffs are doing to inflation.

Powell has been under intense pressure from Trump to cut rates in order to stimulate the US economy and pump up Wall Street stocks.

But despite being called a “total loser” by Trump and facing overt pressure from the White House to cut interest rates, Powell has remained focused on inflation risk (ie he’s continued to do his job properly).

US President Donald Trump looks on as chairman of the Federal Reserve Jerome Powell takes to the podium during a press event in the Rose Garden at the White House. Photo / Getty Images

The suggestion in his speech that a cut may finally be on its way wasn’t enough to placate Trump.

The President continued to attack Powell, saying, “He should have cut him a year ago. He’s too late.”

In fact, the Fed did cut rates by 100 basis points last year, but paused this year to assess the impact of tariffs on inflation.

Sharemarkets love lower interest rates for two reasons.

One is that it reduces borrowing costs for businesses, which boosts profits.

The other is that it makes safer investments like bank deposits and bonds less attractive, so it boosts the flow of capital into equity markets.

Rates relief

Another upside of a (potential) cut to the US cash rate is that it is already putting downward pressure on wholesale debt markets.

Given the scale of US debt markets, that eases some pressure on borrowing costs around the world – including New Zealand, where a sizeable chunk of mortgage debt is still funded internationally.

It should, at the margins, give local banks more scope to pass through the latest Reserve Bank cut to mortgage holders.

With another 50 basis points of cuts now indicated by the RBNZ’s forecast rate track, there is now a fair bit of optimism about the potential for monetary policy to lift the struggling local economy out of the doldrums.

For those fixing mortgages, it is important to remember that the extra rate cuts forecast by the RBNZ aren’t guaranteed.

The market now has about 80% odds on two more 25 basis point cuts (in October and November), taking the Official Cash Rate to 2.5%.

But if the economy comes back to life quicker than expected, the RBNZ might pause again.

Retail recovery

Retail sales data for the June quarter came out on Monday and surprised everyone with its strength.

“Much of our angst about the weakness in the economy stems from our view that households are really struggling from cost pressures,” said BNZ head of research Stephen Toplis in his analysis of the data.

“[The] data put a spanner in those thoughts with total retail sales rising 0.5% for the quarter to be up 2.3% on year-earlier levels.

“It certainly provides ammunition to the market hawks and may be yet another sign the economy is building momentum,” he said. “But we’re not getting carried away yet.”

At HSBC, Paul Bloxham, chief economist for Australia and New Zealand, also pondered how much weight could be put on various partial economic indicators.

As mentioned last week, the Production of Manufacturing Index has only just bounced out of contractionary territory, and the Performance of Services Index remains contractionary (as it has been for the past six months).

But while this week’s retail data was another partial indicator, it was “a big one”, Bloxham said.

That was because retail sales in New Zealand account for around 54% of consumer spending, which itself is around 63% of GDP, he said.

“In short, today’s figures are tangible upside risk to the RBNZ’s forecast from just last week that GDP (when it is published on September 18) will fall by -0.3% quarter on quarter.”

For all these more positive indications for growth, the retail figures did confirm that retail inflation was well contained, Bloxham said.

“So, we do not deny that the door is open for the RBNZ to consider cutting further.

“As yet, though, we are not convinced that the economic growth upswing has genuinely stalled, and we have a close eye on the pick-up in CPI inflation and inflation expectations over the past quarter.”

As I have noted in the past, HSBC’s Bloxham (and other Australian-based economists) have a generally more upbeat outlook for New Zealand’s economy than many of their local peers.

From the other side of the Tasman, the New Zealand economic equation is fairly straightforward.

Says Bloxham: “Our own reading has been that the growth upswing will continue, that the recent wobbles will prove to be temporary, or measurement issues, and we expect growth to be supported by two key drivers: sharply lowered interest rates and a substantial rise in dairy prices to very high levels that is boosting agricultural incomes.”

Hang on, that brings us back around to butter prices! I’ll get my coat ...

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.