[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.