Cheaper milk on the way

NIKO KLOETEN
Last updated 15:10 16/04/2014

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Milk, butter and cheese could soon be cheaper at the supermarket, but shoppers shouldn't expect big price drops.

That's the message from an economist after dairy prices continued to fall, dropping 2.6 per cent at the latest GlobalDairyTrade auction overnight (NZ time).

Dairy prices at the auction have now fallen about 20 per cent since February and ASB is forecasting prices to fall another 10 per cent.

ASB rural economist Nathan Penny said shoppers could expect that decline to translate to lower prices on supermarket shelves, although any price cuts were likely to be modest.

Two litre Anchor blue-top milk costs $4.40 at Countdown ($2.20/l), while Homebrand three litre blue-top milk costs $5.35 ($1.78/l). One-kilogram blocks of Edam cheese are selling at Countdown for $9.49, while 500 gram blocks of Anchor salted butter are selling for $3.79.

"Normally the price at the supermarket doesn't move as much as it does in dairy markets and for farmers," Penny said.

Last year, for example, GlobalDairyTrade auction prices were 50 per cent higher than the year before but the price of fresh milk had only risen 9 per cent, according to Statistics New Zealand.

"From the end of last year when it was at its highest, it's started to come back quite strongly," Penny said.

"I expect to see some of it come back in supermarket prices but not all of it."

Predicting the price impact was difficult because of variables such as wage costs and other overheads and whether businesses were using milk as a loss-leader, Penny said.

"When prices were getting really high Fonterra wasn't passing all of that cost on to supermarkets. At one stage prices were capped," he said.

And he said price reductions could take a while to be passed on to consumers because of supply agreements that used average prices. While it's good news for consumers, the continued fall in dairy prices could spell a lower payout for dairy farmers.

Fonterra is forecasting a farm-gate milk price of $8.65 per kg of milk solids for the current season, which ASB is predicting could drop to $8.50.

It is also sticking to its prediction of $7.80 per kilogram for next season, which Penny said would still be among the five highest farm-gate milk prices ever paid by Fonterra.

However, he said this forecast relied on the New Zealand dollar falling against the US dollar, the currency used in the global dairy auctions.

"If it were to stay high it [the payout] would be something more along the lines of $7."

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