Saturday, April 30, 2011

Don Nicolson: Spilt milk

Only in Australasia could milk pricing inspire talkback radio.  Sir Henry van der Heyden, Fonterra's chair, claims the milk we buy is priced internationally.  Dairy farmers meanwhile point to their share of the retail litre being $0.65 with winter milkers earning slightly more.

The clear point is that farmers are not skimming the consumer cream.

Consumers just want to know if they're being ripped off.

As one scribe recently wrote, "in 2001 the price of Anchor milk at the local dairy was $3.40 for two litres...Since those times Anchor milk has risen to $3.70, then $4.30, then recently to $5..."  But if you run this 2001 price through the Reserve Bank's inflation calculator, you get a very different answer.  $3.40 in 2001 was the equivalent of $4.62 last December. .  Inflation like rust never sleeps and branded retail milk has kept pace with it.  Unbranded milk can be found for much cheaper.  Massey University's Professor Jacqueline Rowarth makes an important point that average wage increases have outstripped food prices.  Food, as a percentage of average weekly household incomes in Statistics NZ's latest Household Economic Survey, fell from 12.3 percent in 2007 to 12.1 percent in 2010.  A drop is no increase.

So does New Zealand have high milk prices compared to other countries?  No we don't.  Last December, one litre of milk cost on average $1.81, but if you lived in France, that same litre would have cost $2.39.  This is despite French agriculture getting €9.9bn in subsidies for 2008 alone - a fantastical sum considerably more than Christchurch's estimated repair bill.  In Canada, a single litre of milk last December would have set you back $3.35 and that's only the tip of a subsidies iceberg.  Each Canadian household pays $357 through taxes to subsidise their country's dairy farmers and this is repeated in United States, Ireland and Britain.  Our retail milk is among the cheapest when exchange rates, sales taxes and a lack of taxpayer support for farmers is taken into account.  It's a shame so many have forgotten the reason why.  That's the ending of subsidised agriculture some 27 years ago which frankly transformed New Zealand agriculture for the better.  This remains our least commemorated or studied achievement and that's got to change.

Yet Australia's ‘milk war' has been behind the calls for a milk inquiry here.  The reason why milk there is at levels last seen in the 1980's is a battle for supermarket supremacy.  The milk loss-leader for Coles Supermarkets is reputedly costing it upwards of $540,000 each week and that's only part of the cost.  Unlike here, Australian milk processing is dominated by the Italians and Japanese.  Their dairy farmers are being squeezed white by the processors to fund this milk war.  All we hear on this side of the Tasman is that milk is $1 a litre in Australia, but the last time I checked, the kiwi dollar was well short of parity.  Nor is there much reporting that milk in Australia is zero rated for their GST.  If you take these into account, AU$1 a litre is actually $1.56 and before the ‘milk war' last December, Australian milk averaged $2.74 per litre. This ‘milk war' cannot go on forever and if their dairy farmers are forced out of business, Australian milk will go up with a bang.

US President Kennedy once said ‘farmers are the only group in society that buy retail and sell wholesale'.

Ultimately, it is consumer demand in response to supply that sets the retail price of milk and in this respect, our milk ain't half bad.

Don Nicolson is the President of Federated Farmers -

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