From fertiliser to grow the grass on our dairy farms, through to supermarkets’ profit margins, we investigate the different costs contributing to the $1 rise in a simple two-litre bottle of milk

Add Covid to the “costs” column of Richard McIntyre’s ledger. The Horowhenua dairy farmer would often be up early milking, but this morning his workers are doing it all, while he tries to recover from a dose of the coronavirus.

McIntyre’s costs column is a lengthy one. The cost of urea fertiliser has doubled to $1370 a tonne this year – and for a 200ha farm like McIntyre’s, that’s $80,000. Farmers are paying more for diesel. They’re paying more on environmental costs like riparian planting and effluent systems.

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They’ve been able to pay those costs, because the farmgate price they’re paid by Fonterra and other dairy companies has also increased this year. But the AgFirst dairy financial survey shows that farmers need a price of $8.48 per kg of milk solids to cover their farm working expenses, debt servicing, drawings, depreciation and taxes.

Last week, Fonterra lowered and narrowed its forecast price range to $8.50 to $9.50 per kg. And increasingly, farmers’ mortgages and other debts are rolling over onto higher interest rates. This coming year looks set to be tough. “It’s going to be a lot harder to break even and pay back debt.”

McIntyre, a Federated Farmers representative, is explaining this because he’s sick of farmers being blamed for families’ soaring grocery shopping bills.

Understandably, the dairy companies want to spread around any blame like semi-soft butter on your morning toast. Brett Henshaw, the managing director of Fonterra Brands NZ, says the big co-op is experiencing inflationary pressure and higher costs at every point in its supply chain. “It’s a similar story behind the farm gate with our farmers also managing significantly higher input costs,” he says.

The price New Zealand consumers pay for dairy products is influenced by global dairy commodity prices and the cost of making the finished products, Henshaw argues. As well as farmgate prices, Fonterra considers labour, packaging, energy, manufacturing, storage and distribution costs in setting prices. “In times of high inflation, like we are currently experiencing, these input costs increase more quickly than usual and are reflected in Fonterra Brands NZ’s wholesale prices.”

This week, Stats NZ reported that food prices have risen 10.7 percent in the past year. Increasing prices for cheddar cheese, yoghurt, and a standard two-litre bottle of milk were the largest drivers within grocery food, says consumer prices manager James Mitchell.

Richard McIntyre farms 450 head of cattle on his 200 hectare dairy farm, near Levin. Photo: Peter Burke / Rural News  

Newsroom has been tracking the cost of that standard two-litre bottle of supermarket house-brand milk all year. In February, we reported the price had risen 8.2 percent to $2.91. Since then, we’ve checked in regularly at Pak’nSave, New World and Countdown.

The big supermarket chains made a big deal of freezing or rolling back prices on staples over winter but, with the Commerce Commission inquiry into grocery competition out of the way, the price has now soared to $3.91.

So who’s clipping the ticket? To be fair, costs are rising across the board. For instance, rising fuel prices impact not just on the farmers with their tractors, but also the dairy companies with their milk tankers, and the supermarkets with their truck-and-trailer units.

But it’s worth noting that at the same time retail food prices have risen 10.7 percent, the new Infometrics-Foodstuffs Grocery Supplier Cost Index shows suppliers have increased their prices by only 9.9 percent on the same items. So the difference is covering retailers’ costs; anything left goes straight to their profit margins.

This week’s update on the grocery supplier index points to recent acceleration in the costs of less volatile items like general grocery goods, which include milk and other dairy.

Cost increases on-farm have accelerated again, the Infometrics update notes, with the Stats NZ Farm Expense Price Index increasing 15 percent in 12 months to September

Fertiliser costs are up 37 percent, and interest rates are up 34 percent, the Infometrics update says. Cost increases are broadening on farms too, with feed costs increasing 13 percent over 12 months, and repairs and maintenance up 12 percent.

Farmers’ fuel costs remain high, up more than 53 over the past year. That’s despite the price of diesel falling back to $2.41 per litre at the end of November 2022 – its lowest since mid- April.

But the update says diesel prices still remain 29 percent higher than a year ago, and earlier higher fuel costs are still filtering through into goods costs across the supply chain.

Despite the rise in the farmgate milk solids price, rising on-farm costs mean farmers are in much the same position they were a year ago – and they face more difficult times ahead.

“Are dairy farmers creaming it?” asks Brad Olsen, Infometrics principal economist. “No, they’re not. On-farm expenses are increasing at the fastest rate since records began in 1993.”

New Zealanders might assume the 10.7 percent increase in their food prices simply mirrored international movements. But they’d be wrong.

In fact, says Infometrics, global food prices remained unchanged again in November, with the latest World Bank commodity price index showing effectively flat food prices for the last five months. “The stabilisation in global food prices, albeit at a higher price, is welcome, but price increases earlier in 2022 are yet to fully flow through to all parts of the supply chain.”

Although food oils have slightly declined in price, grains and other foods prices (including fruits and meats) remain at elevated levels. Beverage prices have fallen, driven by lower coffee prices.

This leaves open the question of just why prices continue to rise in New Zealand, so much faster than global food prices, when the Kiwi dollar is now beginning to strengthen and fuel prices are dropping.

Foodstuffs, which owns New World, Pak’nSave and Four Square, insists costs like fuel, power and labour are continuing to escalate, and it’s currently much more expensive to run a business than it was pre-pandemic.

The co-op group throws its hands in the air and insists its price rises aren’t that high. It says there are many factors contributing to the price of a two-litre bottle of milk. Of every dollar spent at Foodstuffs North Island, around 68 cents goes to the suppliers.

Despite the inflationary pressures, it’s price rices on basic food products have been below the average, through “buying well” and finding efficiencies in our business. No doubt Countdown and other smaller retailers, too, will argue their margins aren’t unreasonably high.

They have to.

As Foodstuffs boss Chris Quin says: “In the face of rising costs, customers will continue to re-evaluate where they shop and what they buy. Value will remain king for them and retailers will have to compete hard.”

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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