I’m a strong supporter of the Fonterra approach. Worked on their legislation. They get some real advantages from it although there are parts which give their competitors an easy run. There is a debate starting around their domestic pricing structure and the Commerce Commission is involved.
Fonterra collects and processes around 90% of New Zealand’s raw milk. In the absence of a competitive market, it is the default setter of the milk price for wholesale and, ultimately, retail.
However I think with their enormous legislative advantage there comes a moral obligation to minimise domestic milk and milk product prices. I hope the Commission does a full investigation and we get a good look and pricing model choices.
This milk prices scandal is complete bollocks from the terminally stupid. The article even points out why:
While Fonterra’s 10,000 farmer-owners are unlikely to swallow any suggestion that the price they receive for their milk be decided by a non-Fonterra party, Ferrier said there were other reasons that domestic price regulation would be a bad idea.
“When governments intervene in industries they cause enormous secondary problems that are not easy to foresee.”
He cited the example of Argentina, about four years ago. When world prices were too high for the domestic market’s liking, the government set a domestic market price.
“Literally within weeks, all the major dairy companies figured ‘we can’t afford to sell at that price’ so they started exporting more. Why wouldn’t they? To stop the exporting [increase] the government put on an export tax … it actually bankrupted some companies. The legal implications are mind-boggling.”
It’s entirely straightforward: if the price Fonterra can get on world markets is enabling them to pay farmers, say, $8 per kilo, milk in the domestic market is also going to have to be priced to return $8 per kilo, or who’s going to want to supply the domestic market? I guess Fonterra could call for farmer volunteers who are willing to take a smaller return than everyone else is getting, but would you step up and volunteer?
I agree with you PM but Labour will push for price Controls because, although it is wrong it will appeal to the baseline labour voter who have no interest in the consequences.
I thought the ‘town milk ‘ price was higher than the export price anyway since those farmers supplying town milk had to provide milk all year and not dry off for part of the season like all the others.
It does seem that the margin over and above what the farmers get is similar to what a monopoly/duopoly would provide . ie excessive.
It seems that no thinks that the return to the farmers is excessive, just what Fonterra and Mainland are getting for themselves
Ok, I always buy a 2 litre of “Cow and Gate” milk (Goodman Fielders generic brand) at the Warehouse for $3.60, in the next fridge a metre away is Fonterra’s branded milk for $4.95 for a 2 litre container. Sorry but anyone who reaches for the Fonterra branded milk then complains about the price is an idiot and deserves no sympathy. Its the same stuff inside folks.
So the champions of the free market support legislative protection from competition for Fonterra but nothing for those who drink milk, eat butter or cheese.
Trevor – you are risking becoming as irrelevant as John Campbell if you raise this issue. See http://bit.ly/hNRs25 for my thoughts on the issue – would value your thoughts.
The fact is in other markets there are cheaper prices sometimes from either inferior reconstituted powdered product or milk being on sale in supermarkets as a loss leader. The price is set globally and Fonterra’s margin (12% according to Andrew Ferrier on Campbell Live) is extremely reasonable.
This won’t close the 20% gap – Kiwi’s are smarter than this.
This all predicated on “the Free Market is the only way.” If you follow through on this then we would be paying zillions more to drive on the roads. The true cost of maintaining/building roads would be reflected in the cost at car registration. Perhaps $5,000-10,000 per year for each car. Instead it is heavily subsidised by a multitude of other mechanisms.
So milk? Bread? Vegies? Why not use the same sort of mechanisms to feed basics to New Zealanders?
If I go to the UAE I pay 45cents per litre of petrol. By your “Free Market” rules, I should have paid $2.20. (In durhams of course.)
Have read it Darren. Don’t think you have taken into account the advantage to Fonterra of their legislation and my main point ie whether Kiwi consumers should share their extra profits through cheaper products
So the champions of the free market support legislative protection from competition for Fonterra but nothing for those who drink milk, eat butter or cheese.
In what sense does supporting a farmer’s co-op constitute “championing the free market?” And what business does a Labour party have helping to demonise a group of workers who’ve formed a co-operative to give them some leverage when it comes to the price they get for their work? Isn’t that exactly the purpose behind labour unions?
The true cost of maintaining/building roads would be reflected in the cost at car registration. Perhaps $5,000-10,000 per year for each car.
No. The true cost of maintaining / building roads would be to pay to drive on them, not to simply own a car!
If I go to the UAE I pay 45cents per litre of petrol. By your “Free Market” rules, I should have paid $2.20. (In durhams of course.)
Nope. In the UAE its subsidized, and here its taxed, and neither prices are set by ‘the market’.
Pyscho, the support for the ‘itsy bitsy farmers co op was making it an effective monopoly.
A typical capitalism manoeuvre by the way. Its long past a few farm workers getting more for their pails of milk in the village
All I know is that the warehouse is too far away and have to rely on supermarket and dairy prices. That is $4.80 for 2ltr milk. That is the cheapest milk, not the branded milk. I do not want to see it go over $5. I spend around 24+ a week on milk alone already. Cheese is expensive but I buy a 1kg block every month, cut it in half and freeze half of it, pulling it out when the first half is finished. Cheaper to spend $16 or more on a kg than it is to buy a lesser quantity more often. I use Eziyo yoghurt which is around 3-4 and makes a litre. Lasts around 1 1/2 weeks.
I admit I don’t really understand the economics of it, I only concentrate on the family budget and my children’s nutrition, making sure they get enough is the most important thing to me.
“However I think with their enormous legislative advantage there comes a moral obligation to minimise domestic milk and milk product prices.”
Isn’t that why section 115 was built into the Dairy Industry Restructuring Act? Wasn’t Parliament saying by its inclusion, “you now have the goose that lays the golden egg, don’t be jerks about it”?
“The Governor-General may, by Order in Council made on the recommendation of the Minister, make regulations that … require new co-op to supply raw milk in New Zealand; and ,,, specify a price or prices for it”
“moral obligation” ? You are to kind, Trev, much too kind.
With the greatest of respect, before appealing to morality, we need to remember one thing – it is a matter of social contract.
If the market farces won’t deliver fairness for the people, the duty is on the Government to roll up its sleeves and regulate.
On Campbell Live they figured out over half the amount you pay for milk goes to the supermarket and the distributors.
Spam “he true cost of maintaining/building roads would be reflected in the cost at car registration. Perhaps $5,000-10,000 per year for each car.”
No. The true cost of maintaining / building roads would be to pay to drive on them, not to simply own a car!
Problem with your suggestion Trevor is that it would result in less milk on the NZ market and would be seen as protectionist by trading partners. Both outcomes would be worse for Kiwi consumers.
If Fonterra are the big culprit can you explain what you think is a fair margin for them as 12% on local sales seems very reasonable to me.
Oops: Spam. The point I was making was that it seems OK to subsidise the huge cost of road use by a variety of means in spite of “market forces” which should vastly increase my driver fees. (Registration fees are easier to imagine than tolls.)
So, why can’t the same methods be applied to the process of selling milk and other basics? Subsidies would upset our foreign image? Ok. So give it another name. Call it Basic Food Demand Equity, or Basic Human Rights Delivery.
Keep it simple – there is market failure in milk pricing in NZ.
Bring out the legislators’ pens. Action!
Moving on to the next market failure issue to address: electricity pricing …
I want my milk!
The poories deserve some milk too.
darrenw there is an obligation to supply other companies. That’s not that hard to replicate for local consumer supply.
Trevor – But they supply at the global price to other suppliers so it wouldn’t change anything??? Essentially Fonterra wholesaler at one price to all suppliers, including itself. What you are proposing is they become disadvantaged in the local market compared to those they are legislated to provide to at cost. That is hardly a fair market. If I was them I would be shipping more offshore for a better price. Legislating for an uncompetitive situation is not the answer despite it having populist short term political currency.
LOL, alot of you miss the point, Kiwis cant aford to buy the amount of milk and milk products we used to.
It doent matter who caused it, the easy target for the average kiwi to blame, is farmers and fonterra, and they are doing just that.
NZ is becoming a very divided country of perceived haves and have nots.
Sadly alot of the have nots seem to still blame labour going by the polls. I wonder if they realise that Labour got voted out at the last election?
A Mother ” That is $4.80 for 2ltr milk. That is the cheapest milk, not the branded milk”. Its about $3.50 for 2 litre Homebrand from Countdown for me – perhaps shop around supermarkets?
What would be good is a website comparing milk prices from all the outlets around the country – encourage competition amongst retailers. It could be kept constantly updated in a wikipedia kind of way by consumers visiting the website. One comparing petrol prices would be great too.
“However I think with their enormous legislative advantage there comes a moral obligation to minimise domestic milk and milk product prices”.
Or you could remove the “enormous legislative advantage”? If now too ingrained in the market then perhaps a supernormal profits tax to regulate the supernormal profits in boom times. How much tax do Fonterra actually pay again??
Consistency is the key, if they want to price milk according to international markets they can do so without legislative advantage back in NZ. This eventually includes having them chop for this silly carbon tax.
@Bea
I do not have a car so am limited to the closest supermarket and the only one in walking distance. That is New World. It is just too hard to catch a bus with 2 preschoolers (cost $7 return) to go anywhere else.
My sympathy
coke is cheaper than milk = diabetes obesity
beer is cheaper than milk = alcoholism crime death
expensive milk = more expense overall to the health system
cheaper milk = healthier society less cost to health system
If labour can reduce the cost of Milk they have a good chance of winning the election this year
The only valid way of reducing milk is either.or a combination of
1) remove GST
2) subsidise the price of milk
Fixing milk price in other ways will result in major issues for New Zealand, and lead to issues similar to other countries as set forth by Andrew Ferrier.
If reducing milk, why not decrease the price farmers get for fruit and vegetables? The consumption of these products are likely much lower, compared to current recommendations than what is currently consumed in the way of milk/dairy products. What about decreasing the cost of lean meat?
The hypocrisy of Goodman Fielder, complaining that Fonterra is charging more for their raw milk. If its too dear, supply your own. Surely with such high prices from Fonterra, there will be plenty of profit available.
Why are the local producers of milk, westland sell their powder into the NZ market? surely there is such a large margin available with Fonterra over pricing all of its stuff?
No, most likely the government, it matters not who, will once again cut those tall poppies down to size. That’s the way to a greater economy and improved living standards.
A Mother,
Purchase powdered milk. Far cheaper than liquid, only a little more work in preparation. I purchase 1kg of powder, to make 10litres of milk, for just under 10$ – depending on the market – I generally get PaknSave or Countown, who have similar prices for their powder. New World is a little more expensive, but it is still substantially cheaper than liquid.
If you have the opportunity, you may even be able to purchase a large volume through the likes of Davis Trading and have them deliver.
All good stuff, to reduce the cost of milk and dairy products. As with other complaints about the current state of New Zealand, the question remains – how, what policies will be put in place by a Labour government? Do you want to nationalise the Dairy industry, or other industries, will you tax non-healthy food and drink, will you reduce GST to its former 12.5% as the red bus tour claimed was to be the case? Its all very well sitting on the sidelines throwing stones, but if you have no alternatives to offer, what on earth is the point? What is Labours intention?