Why is New Zealand’s retail milk so expensive?

[This post was first published in the Fairfax NZ Sunday Star Times on 30 March 2014]

Visitors to New Zealand often ask me why our supermarket milk is so expensive compared to in their own countries. I tell them the answer is simple. First, we have little competition, with only two milk major processors (Fonterra and Goodman Fielder) and two major supermarket chains (Foodstuffs and Progressive). Also, unlike most other countries, the Government in New Zealand does tax food.   Both answers are typically received with surprise.

I am sure it will also come as a surprise to many New Zealanders to hear they pay more for their milk than the British, the Australians, the Americans and even the Canadians. So let’s do some comparisons.

First let’s set the New Zealand baseline. These prices come from New World in Invercargill and were obtained there by my super-sleuth wife on 22 March. Fonterra’s Anchor brand was selling in 1 litre containers for $2.65 for all three categories of standard, lite, and trim. The 2 litre packs, when converted to a per litre figure, were $2.30. The Calci+ was $2.50 per litre. The Pams house brand for all categories was $2.25 in 1 litre packs and $2.08 per litre in the 2 litre packs.   Fonterra’s budget brand ‘Dairy Dale’, only available in 2 litre packs, was originally priced at $1.93 per litre but was on special at $1.70 per litre.

While my wife was super-sleuthing on a quick trip to Invercargill, I was in London sponsored by UK charity Food and Behaviour Research. That visit provided an opportunity to look at milk marketing in the UK.

In the UK there are three major milk processors – Arla, Muller Wiseman and Dairy Crest – and many minors. There are four major supermarket chains – Tesco, Sainsbury, Asda, Morrisons – plus many minors. The competition is fierce.

Standard supermarket-brand milk in the UK is currently selling for 44p per litre. This equals about $NZ 0.86 per litre at current exchange rates. No, I have not made an error. This is the price per litre when purchased in either 2 litre or 6 pint (just over three litre) containers. So this is only one half of NZ budget milk Dairy Dale and considerably less than half of other NZ brands. This is despite UK farmers currently getting paid 20% more than NZ farmers.

The retail situation in Australia is similar. The two big supermarket chains over there are Coles and Woolworths. Both sell their house brands for $AUD1 per litre. At current exchange rates, this is about $NZ1.06 per litre.

In America, the housewife typically buys her milk by the gallon. I was in Colorado some weeks back, and even in a mountain town, some hundreds of km from the nearest dairy farm, we could buy our milk for $US3.60 per gallon. An American gallon – different to the imperial gallon we used to use in New Zealand – is roughly 3.6 litre. So in New Zealand dollars, we were paying about $NZ 1.20 per litre.

In Canada one would expect milk to be expensive. This is because they have a supply management scheme to protect farm level prices, and their farmers are paid about Canadian 80c per litre. However, when bought in 2 litre and larger packs, it only costs about $1.50 per litre at the supermarket. That equates to about $NZ1.60 per litre at current exchange rates. So even in Canada, the consumer can buy milk for less than the cheapest New Zealand milk.

Clearly, someone in New Zealand is doing very well out of the system, but it is not easy to find out the respective shares. We know the final price, and we can calculate what the farmer gets. We can also calculate the GST paid on milk. But everything else in the middle is held in commercial confidence.

Per litre of standard milk, the NZ farmer is this year earning about 55c. Last year it was about 40c. In calculating these prices I have made allowance that even in ’standard’ whole milk, some of both the fat and protein in each litre of milk as produced by the cow, are diverted to other dairy products.

At the other end of the chain, and using the Pams price of $2.08 per litre as an example, the GST is 27c. So that leaves this year about $1.26 per litre for the processor and retailer. Comparable figures in other countries to this $1.26 are 20c in the UK (where it is currently abnormally low because of a price war), 55c in Australia, 60c in the USA and 75c in Canada.

There are two big messages in all of this. The first is that when there is not much competition, such as in New Zealand, processor and retailing margins quickly balloon. The second is how unusual New Zealand is in taxing basic foods such as milk. For many years the dominant political mantra in New Zealand is has been that it is fiscally inefficient to exempt food from GST. Other countries see it differently.

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, Dairy, The Fairfax SST Articles. Bookmark the permalink.

35 Responses to Why is New Zealand’s retail milk so expensive?

  1. Pingback: Rural round-up | Homepaddock

  2. Peter Salmon says:


    Is not milk subsidised under the CAP?

    • Keith Woodford says:

      There are no direct payments in the UK related to milk production. But farmers do receive grants for environmental stewardship.
      Also, there has been a supply managemnt scehme which leads to farm gate prices higher than world prices. This will change in April 2015 when production quotas are eliminated.
      The key point is that supply chain competition and efficiencies more than compensate for the higher farm gate prices.
      In NZ we are very proud of our efficient milk production systems. But the rest of our supply chain through to the NZ supermarkets is a mix of super inefficiency and super profits.

  3. DavidW says:

    You did miss the other key point that highlights the difference between NZ dairy and other countries. No other country is as dependent on international trade as NZ and no other country processes such a high proportion of its production into exportable products. Europe, Canada, US etc all process as much or more into local market milk as they do into manufactured (ie exportable) products like butter, whole milk powder, WPC, cheese etc.

    The logic therefore is for price setting to be undertaken on the (economically sound) basis of the next best economic use of the raw material and is therefore related to the international trade price for the mix of alternative outputs. Your points are valid when you refer to the lack of competition etc but the reality is that Fonterra would not really notice it much at all if the local market totally dried up and they could process all their milk supply for export.

    • Keith Woodford says:

      You are correct that Fonterra would not be greatly affected if it did not have a local market. And NZ farmers would not be affected at all in reagard to the milk price they receive. However there would be some impact on the Fonterra dividend. I cannot quantify that effect. And, elsewhere in the fresh milk business, some people are benefitting from the lack of competition. The people who are benefitting are not the consumers. In contrast, it would seem that supermarkets do indeed earn very good margins – much higher than in other countries.

  4. Sui says:

    Hello, I’m commenting from Canada. I’m surprised that milk is more expensive in New Zealand than in Canada. Where I live, cows are typically confined to barns. In the summer time when the ground is firm enough cows might get exercise outdoor but it is up to the farmers’ management decisions if cows get access to pasture or not. That means feed are chopped, stored, and brought in 365 days a year. I live in a milder climate than rest of Canada. Being cold might have other consideration to keep them comfortable and maintain production level at the same time. I always thought that New Zealand, where my stereotypical idea was that it is milder climate than us and thus cows could be pastured to save cost and hassle, would have better milk price than us Canadians. The consumers here complain about our price being higher than the neighbor south of the border. As far as what the farmers are getting at whole sale price, I’m not a farmer so I don’t know exactly. I thought that our farmers were getting between something like 80 cents per litre (including butter fat and other bonuses). Just looking at the info above, New Zealand’s price doesn’t easily make sense.

    • Keith Woodford says:

      I think it does make sense although that does not mean that it is a good situation. The key issue is lack of competition in the post farm gate part of the value chain. And this lack of competition combined with lack of regulation leads to both nice profits and inefficiencies in that part of the overall supply chain

      • DavidW says:

        Part of the answer may well lie in the different milk composition at the farmgate. Comparing volume output per stock unit between countries would, I almost guarantee, reveal that a North American cow will produce 2 – 2.5 times the volume of a New Zealand cow while the percentage of milk solids in the New Zealand production is much higher as that has been the breeding emphasis since way back when payment on a fat basis was dropped. The payment model of a + b – c (fat + protein – volume) penalised volume and it went to the stage where fat was assigned a negative value in the formula in the 1980’s and discussion centred around how fat could be disposed of and where it could be buried safely.

        At the end of the day though you end up with every litre of milk in New Zealand is effectively costed by taking the value received on sale overseas and then deducting the costs of production outside the farm gate. As such it bears little or no resemblance to the farm cost of production. Keith would be able to elucidate on what part of the value chain gets allocated into Fonterra dividend as opposed to the milk payout ($/Kg of milksolids) as it post dates my involvement in the industry.

        I’m not defending profit margins at all however, but from a purely economic point of view the retailers are charging what the customer seems to support (totally free market) and the farmers (with minor exceptions for out-of–season production) get paid a representative value for their product. The relevance to other countries escapes me.
        Comments about small market size and lack of competition remain valid though.

  5. Keith Woodford says:

    To the extent that Fonterra makes a profit on processing marketing milk in New Zealand with its Anchor and Dairy Dale brands, then this will flow through into company profits which can either be retained or paid out as a dividend. In essence, profits = wholesale price of branded milk minus processing cost minus cost of raw milk.
    The retailers charge what the market will bear, rather than the price customers ‘seem to support’. Economic theory is quite clear in relation to monopoly profits, and where there are only two processors and two retailers of any scale then the competition is still less than effective.
    The relevance of what happens in other countries is that it demonstrates the effect of genuine competition in reducing the margins between the farm gate price received by farmers and the retail price paid by consumers.
    I have tried to be clear in stating that high margins are occurring post farm gate. There is nothing excessive about what the farmers are receiving for their milk. The farm gate price is roughly 25% -35% of the retail price

  6. alan stuart says:

    I am surprised thatFontera has failed to address your stance on this issue , Keith. Maybe NZ consumers dont rate in Importance to them ! This lack of competitivenes was a danger forseen by Treasury when the amalgamation to form Fontera was beingcontemplated ,way back.
    I am very concerned that the same push to squeeze the competitivenes out of the meat industry will eventuate in same.Also, farmers will suffer a lower price as well, due to lack of competition at the farm gate .

    • Keith Woodford says:

      Fonterra would have figured that getting into a debate on this one would be unproductive for them. But we should not forget the supermarkets in all of this. It is probably there that most of the profits are made.
      As for the meat industry, yes there is an argument that processor competition is in the farmers’ interests. From what I have seen of the meat industry, it is more efficent than many farmers give it credit for.
      There is surplus capacity in the meat industry and at some time this will need to be rationalised, but when this occurs farmers need to be careful that they don’t carry the restructuring cost on behalf of the processors.
      I would like to see farmers committing to processors on a processing year by processing year. It is up to the processors to put such a system in place such that farmers benefit from making the commitment.
      Keith W

      • alan stuart says:

        Yes, but as a legislated monopoly,they [Fontera] owe NZ an explanation.Retail competition should ensure that someone somewhere would undercut.But I cant find them.
        Meatindustry surplus capacity shouldnt be regarded as a problem, more a necessary asset as it will be called on in times of early drought, or abnormally high production occasions. Otherwise we as farmers will wear it in disasterously protracted killing delays.
        Most farmers are pretty loyal to their processors ,currently, Keith but a lot of us still have scars from busted operators, so can hardly be blamed for not spreading the commercial risk.
        Alan Stuart

  7. Keith Woodford says:

    I understand why some farmers hedge their bets and a 50/50 split is a good way of keeping each company honest. But I am told that there are about 20% of stock that are sold by the so-called Sunday night auction, and that is enough to cause mayhem through the supply chain. I would much prefer to see these issues sorted out at the start of the season as to who was supplying who (just as in the dairy industry) and then make another decision prior to the start of the next season. I believe it is now possible to retain rights to the carcass value unitl the payment is actually received and that it is quite easy to set up. It is something that Fed Farmers should be educating their members about.

  8. Barry says:

    A factor I think not being considered in the calculations is the effect of NZ seasonal milk supplying a market continuously over the whole year. It obviously costs NZ farmers a lot extra to produce milk in winter – so local market milk costs Fonterra (and others) more on average than milk for export powder. Other countries do not have this same seasonal milk supply differential.
    Also if it was the processors making excessive margins on milk don’t you think that Synlait, Miraka and Open Country + anyone else would be more interested? The entry barriers are low as the investment cost required to produce bottled milk for the local market is a lot less than building milk powder plants.
    A final relevant issue I think for NZ is scale. We do not have the population and particularly the large cities compared to the other countries mentioned. I know the UK in particular have huge centralised milk bottling centres and distribution networks, while in NZ this is more regionalised.
    Therefore costs to get milk on the supermarket shelf in NZ are probably somewhat higher.
    That is different again to milk powder processing where NZ has the scale to compete internationally.

    • Keith Woodford says:

      You make some good points.
      Fonterra does pay winter premiums and these were not built into the figures I calculated. Some quick calculatons I have done suggest this could raise the average purchase price by several cents, but not a lot more.
      I think the cost of entry is actually quite high. It is not the cost of the bottling plant, but the cost of setting up the logistics system and gaining market access to the supermarkets. And if the new entrant were successful, then the existing suppliers would themselves respond. Entering the local retail market would be a dstraction for Synlait, Miraka and Open Country.
      Some industries have features of natural monopolies. Airlines are a classic example. In NZ we only have one carrier into some cities such as Invercargill and that carrier charges extremely high prices. If a competitor were to emerge then the dominant carrier would reduce the prices to a level where the new entrant crashed, and then up the prices again. Bully boy tactics can be very effective, both in destroying new entrants, and even before that by unspoken behavioural threats, thereby discouraging potential entrants from even commencing business.

  9. Sheryl says:

    Very interesting article…do you know by chance whether the cheaper brands such as Budget and Pams are exactly the same milk as the expensive brands such as Meadowfresh and Anchor? Is it simply repackaged or are the ingredients different?

    • Keith Woodford says:

      I think they are probably exactly the same but the companies will not want to get into any discussion on that. The milk certainly comes to the factory from the farm in the same tankers, and should have the same bacterial counts. Probably all the major NZ brands standardise using a process involving the use of permeate to dilute the fat and protein. In many countries the use of permeate is no longer commercially acceptable. However, this is more an issue of consumer perceptions than any known health issue.
      Keith W

  10. Matt says:

    Would it be cheaper to import our milk?

    • Keith Woodford says:

      Transport costs for fresh milk would be prohibitive.
      An exception is UHT, particularly for A2 milk, for which there is no local UHT A2 supply, and the fresh supply is not well managed.
      But any imports would still be subject to 15% GST and high retail margins, and these are the key items that make our milk so expensive.
      Keith W

  11. The reason is simple…NZ depends on its export of agricultural products where as other countries dont

    New zealand has nothing to export other than agri

    • Keith Woodford says:

      The value of the raw milk itself (which the farmers get paid, and which is determined by the export value of milk powder after processing costs are deducted) is only a small proportion of the final cost of retail milk. It is the fresh milk processing and retail margins within the supply chain after it leaves the farm which are higher than other countries. And that relates very much to a lack of competition both in processing and in retailing. And then of course GST of 15% is a further charge which most other countries do not have on products like milk.
      Keith W

  12. hgsf@sas.com says:

    If it is true that NZ exports 95% of it’s milk production then the conclusion I would draw would be that producers can earn more by exporting. This sets the price of the domestic market. The fact that there are two major producers and two major retail outlets in this case does not materially affect prices. Right?

    • Keith Woodford says:

      The export price minus processing costs determines the farm gate price. This export farm gate price then applies to the local milk farm gate price, with additional cost for winter milk. Post farm gate costs (pasteurisation, packaging, retail margins and GST consumer taxes)T that are then added on to obtain the final price. These post farm gate costs include considerable margins and this is made possible by the limited competition.

  13. rm says:

    I used to live in NZ and now live in US for over 10 years. Have you tasted the Milk in USA?! I don’t care if its cheap. But they are NOT drinkable. They taste like fish mixed with water. I quit drinking milk after moving to the US from NZ due to the horrific taste. NZ Milk is fresh and creamy. Worth every penny! So far, I have only found TWO organic brands that taste acceptable in US. And they are very expensive.

  14. BJ says:

    NZ the milk companies dilute milk down with permeate, which is a watery natural high-lactose waste product. Lactose is a big issue for people unable to dairy products. New Zealand also has the second highest prevalence of asthma and the highest youth suicide rates in the world. The big question – are NZ milk companies slowly kill us by adding permeate for profit ? . As a big milk drinker all my life, have always felt Australian super market milk (non permeate) tasted so much nicer. Milk from Italy and Switzerland also http://www.naturalnews.com/010443_cows_milk_asthma.html

    • Keith Woodford says:

      You are correct. Permeate is indeed added back in to almost all NZ milk, although as far as I know (I am not certain) Fresha Valley do not do this with their NZ A2 milk. And yes, the NZ companies are doing this for cost and hence profit reasons. Permeate is something that very few New Zealanders know anything about. Although permeate is often described as a waste product it is important to recognise that it does actually come from the milk itself. It is not a non milk additive. A quick check of three bottles of milk shows that A2 from Fresha Valley has 4.7% lactose, Pams low fat has 4.8% and Pams extra slim has 4.9%. So for that particular comparison there is not a lot in it.
      It is only in the last couple of years that Australian supermarket milk does not have permeate added back in.
      Not all permeate is the same, and some permeate could have more lactose in it.
      What is also not widely known is that all NZ milk powder has lactose added to it, with most of this lactose coming from the united States and Europe. So NZ milk powder is indeed made in NZ but it includes imported ingredients! This is to standardise it to international component levels.
      Yoghurt tends to be lower in lactose than milk because the yoghurt bacteria gobble it up. But in NZ it is not possible to tell the lactose content of the yoghurt, In large part this is because sugar is added to most yoghurt and the label does not differentiate between lactose (i.e. milk sugar) and other types of sugar (non milk sugars).
      For non sweetened yoghurt, the sugar on the label should be the lactose content.
      No-one has managed to prove that permeate is a health risk but it is likely to affect the taste of the milk.
      And I do agree wholeheartedly that although no-one has proved that permeate is a health risk, there are good health reasons not to consume too much lactose or indeed any other sugars.

  15. Robert says:

    I run businesses in Canada and Australia (as well as NZ) and our GST system is far superior. There are too many exemptions and non-taxable items in Canada and Australia. Broad based, extensive system with lower rates of income tax is far more desirable than what the alternative is. Also the US sales tax is not refundable.

    • lethally says:

      It depends what you mean by “superior”.

      Superior in raising revenue? Maybe. Superior in keeping people on baseline incomes broke and struggling to feed their families? Absolutely. Superior in keeping New Zealand’s black market / cash-in-hand economy thriving? For sure.

      Having lived in both Australia and New Zealand for many years, I’d have to say Australia’s GST exemptions on basic foods is fairer for families, and makes a huge difference to family budgets and food affordability.

      As to the cost of milk, yes, New Zealanders are getting ripped off. That is undeniable. I’ll be interested to see how much we sell our milk to Canadians for when the TPPA inevitably passes through. Certainly it will be less than we can buy our milk here in our own country.

      And I’ve no doubt that John Key – or whichever politician is in power – will bluster on about how it’s a fair price. Fair to profiteers and politicians back pockets. Business as usual.

  16. Pingback: Keith Woodford says a lot depends on how Singapore/Hong Kong-owned Goodman Fielder responds to potential changes to their cosy access to Fonterra's milk supply | My Blog

  17. Pingback: Keith Woodford says a lot depends on how Singapore/Hong Kong-owned Goodman Fielder responds to potential changes to their cosy access to Fonterra's milk supply - Moonlight Chartered Accountants in Manukau

  18. Kevin Nguyen says:

    Hi. How do you calculate the GST (I was very curious)? Sorry if this feels like a weird question.

    • Keith Woodford says:

      GST is added at 15% of the pre GST price.
      Therefore GST = 13.04% (15/1.15) of the quoted retail price.

  19. Phil says:

    Considering competition, there is even less in Finland (a country of similar size and not a place conducive to dairy production) https://en.wikipedia.org/wiki/Valio, but the prices there are still around a dollar a litre

    • Keith Woodford says:

      According to the latest Euromonitor report on Finland, Valio has a 33% market share for drinking milk and Arla has a 30% share. Also according to Euromonitor, the drinking milk market is very competitive and there has been a ‘milk price war’ over the last year.
      Keith W

      • Phil says:

        Hi Keith, thanks for that, maybe Wikipedia was a bit out of date. Still with a similar setup to NZ with a couple of predominant players, the prices are a whole lot cheaper.

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