Milk ’Investigation’ a creamwash

The MAF review of the domestic milk market in New Zealand is a creamwash – which is to say that if it isn’t a complete whitewash it certainly comes close. It fails to address the central issue of the lack of competition in the domestic market.

In fact it admits it hasn’t even investigated this issue, and therefore ‘cannot comment on whether there is sufficient competition in the domestic market.’

It doesn’t tell us how the price of milk is set. Farmers say they receive less than 30% of the price of milk, but it fails to shed any light on what makes up the other 60%.

These are all valid questions and its time that we had some transparency into how domestic prices are set, and some assurance that supermarkets –or Fonterra- are not putting exorbitant mark-ups on milk.

It does reveal that international price rises are very quick to be passed on, yet very slow to come down domestically, when there is a fall in the price of milk.

The reality is that two main players Fonterra and Goodman Fielder control 95% of the domestic milk market, which means there is effectively no real competition in the domestic milk market. Goodman Fielder, gets all its raw milk from Fonterra, which sets the raw milk price.

And while much is made in the report about how domestic milk prices are ‘intrinsically linked to international prices’ which are trending upwards, it fails to answer the question –why, when milk prices come down globally, the price of milk in New Zealand does not.

It also fails to answer the question, why are milk prices far cheaper in most other countries we trade with?

After pointing out that the ministry doesn’t have the right powers to answer any of the main questions the MAF report then argues against a Commerce Commission inquiry and suggests perhaps a government department may want to further investigate this issue.

After reading this report I personally disagree with MAF’s assertion and consider it is in fact high time for the Commerce Commission to investigate dairy pricing in New Zealand.  This investigation needs to look at how retail prices are set.

The Commerce Commission has extensive powers to investigate the consumer dairy markets and its time it exercised this power to answer the many remaining questions left unanswered by MAF’s report.

25 Comments Posted

  1. Farmers Markets first, but Consumers co-ops might be the way to go for those purely price focused if large enough or well networked between co-ops. To get scale to compete against the overseas owned Progressive and NZ retailers co-op Foodstuffs supermarket chains in even a single well populated area would need a significant initial investment if regular tanker size volumes are being considered. Distribution-sales of a single consumer product really needs bulking up with other bulk purchased basic commodities for consumers wedded to the one stop shop concept to become involved. There are many small scale organic co-ops where consumers have banded together for price benefits and in smaller areas, access to goods not supplied by local retailers. Networking those may give scale for organic consumers.Local farmers with direct sales in glass has to be optimum. Getting NZ’s richest man to re-instigate the glass bottles he helped remove from the market,quiting his unrecyclable cartons and the plastic containers would go someway as well to getting milk to be truly sustainable. Keep it as local as possible and keep the financial benefits in the community.

  2. An increase in the number of farmers failing significantly to meet effluent rules is unacceptable, says dairy giant Fonterra.

    The update for the Dairying and Clean Streams Accord showed significant non-compliance increased by 1 per cent to 16 per cent for the 2009/10 season.

    Overall the result for dairy effluent being appropriately treated and discharged increased 5 per cent to 65 per cent, reclaiming the lost ground from the 64 per cent result in 2007/08.

    Fonterra Group Director Supplier and External Relations, Kelvin Wickham said an ‘every farm every year’ inspection regime was a concerted effort to address non-compliance by identifying farms at risk and ensuring remedial plans were put in place.

    “The programme got underway nationally in August so it was never going to change last season’s results,” Wickham said.

    “But what is encouraging is that the compliance message is getting through and farmers are taking it seriously.”

    By the end of this season Fonterra expected to have 1,000 remedial plans in place.

    “Since August, 252 farms have already completed their plans and a further 582 are underway,” he said.

    “There are no quick fixes but farmers are working hard to get it right and in many cases a significant investment is needed to ensure systems are compliant 365 days a year.”

    Good progress was being made on other targets, Wickham said.

    “Across the country there is a lot of good work going on unnoticed and while we know there’s more work to be done, it’s also appropriate to acknowledge the real efforts being made.”

    Green Party spokesperson for Agriculture and Conservation, Kevin Hague said levels of significant non-compliance by the dairy industry had increased over the last three years, showing that voluntary measures were utterly insufficient to protect waterways.

    New Zealand urgently needed clear rules for clean water, he said.

    While some farmers were doing a great job, the progress report highlighted the problem with a voluntary code, said Hague. “The non-compliance of a few undermines the success of the code for everyone.”

    “MAF Deputy Director-General Paul Stocks has said that good early progress was made with the Accord, but all the easy wins have been achieved. So, now is the time for the Government to regulate the impact of dairy pollution with enforceable water quality standards,” said Hague.

    “With compliance decreasing, the dairy industry has proven it cannot successfully regulate itself. We need the Government to adopt clean water rules now,” said Hague.

    Agriculture Minister David Carter said dairy farmers were “slowly taking heed of his challenge to lift their game when it comes to pollution.”

    Carter says that while progress could be faster, the message was gradually getting through to those farmers who had struggled with effluent compliance, and were now looking to their industry bodies and regional councils for support

    “For example, in Canterbury, the ‘Check it, fix it, get it right’ initiative has been working to provide information and advice to farmers on adopting good effluent management practices,” said Carter.

    Significant non-compliance in Canterbury fell to 8 per cent from 19 per cent in the previous season, he said. This initiative was now being rolled out throughout the North Island, and Southland.

    The Fonterra Shareholders’ Council chairman Simon Couper said farmers understood that achieving an acceptable level of compliance needed continuous improvement.

    “It is understood that the focus on sustainability will impact on our right to farm and trade, and this will continue to be of greater importance over time,” Couper said.

    MAF Deputy Director-General Paul Stocks said farm effluent management was a critical part of a successful farming business.

    The update reflected the fact that a consistent effort by the partners to the accord was needed to improve farmer behaviour and farm system performance, Stocks said.

    “After the good early progress of the Accord, all the easy wins have been achieved,” he said.

    “The sector is at now at the stage of incrementally improving farming practices and upgrading equipment.”

    Dairy cattle excluded from streams, rivers and lakes:

    Target: 90pc by 2012 (50pc by 2007)
    Result: 85pc, up 5pc.

    Regular crossing points have bridges or culverts:

    Target: 90pc by 2012 (50pc by 2007)
    Result: 99pc, up 1pc

    Systems to manage nutrient inputs and outputs:

    Target: All farms by 2007
    Result: 99pc, no change

    Effluent discharge to comply with resource consents and regional plans:

    Target: All farms immediately
    Result: 65 per cent, up 5pc

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10713074

    green bottling, replacing petroleum based plastic bottles.

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10712905

  3. Places like Export Meat and some service stations have milk at prices very competitive with those at supermarkets. An issue is brand value added onto the domestic/export price. We may have the Adidas of brand values on our milk where the rest of the world does not.

  4. Kaka,

    The “domestic” milk price implies that the price they pay in Dunedin is competitive to the price they would have to pay if they shifted production to say Chile or Brazil.

    The “domestic” price they may have to pay in the foreign lands may be higher then the NZL “domestic” price.

    Cadbury would be in a strong position to pay a low price simply on bulk purchasing power, bulk packaging (milk tanker full) and fixed priced long term contracts.

    The supermarkets are in the same position, bulk purchasing and fixed price long term contracts.

    Consumer can enter that type of reduced price purchasing power by forming cooperatives and approaching fonterra (or overseas milk suppliers) for long term fixed price contracts.

  5. The farmers are Fonterra collectively and need to pull Fonterra’s global head in to being a more responsible co-op rather than a global corporate led by an executive that lacks responsibility towards Aotearoa New Zealand’s environment and broad community. That does not mean that we need to dismember Fonterra, it means that there may need to be intervention on its broad activities and there is nothing to stop environmental and animal welfare compliance being enforced no matter the structure. Kaka, can you be certain that $7/kilo of milk solids allows for compliance to optimum environmental, employment and animal welfare standards? Capitalist/co-op/other agrarian reform based, all need to ensure optimum ethical standards of production. Anything less means the price of production is being subsidised by the externalities the broad community eventually pays. Dairy workers,animals and soil health pay immediately. When the true cost of production is determined, then criticism of the unit price paid at the farm gate might be appropriate. While that more difficult figure is being determined we can look at the simpler issues of profiteering at the wholesale/retail level.

  6. Why are NZ dairy farmers whinging about their share of the milk price ? They just got a record payout of about $7 per kilo of milk solids. 23 percent higher than last year. They get a payout PLUS a dividend as shareholders in the Fonterra co-operative. The dairy farmers ARE Fonterra.

    Of more interest is this from Cadbury in Dunedin, at the end of the stuff article on the milk price investigation report from MAF when Cadbury says “key to keeping its manufacturing in NZ is its ability to purchase milk on long term contracts at a competitive domestic price”.

    That implies that there IS a “domestic price” floating around out there for Fonterra milk, despite all the Fonterra protestations that the NZ price of milk is set by the international market.

    So Cadbury (and presumably other domestic customers), can get a “competitive domestic price” but not NZ consumers.

    Fonterra is quick to blame the supermarkets and other retailers. The retailers are quick to blame Fonterra. The truth is they are all greedy, self-serving capitalists, who don’t care about how much the NZ public have to pay for milk.

  7. Lets be careful what we wish for. When the apple sector had its predominant single desk opened up to free market competition, the sector crumbled. Kiwifruit are quite well buffered from fellows competing the price down in international markets to unsustainable levels. We need to look at where the excessive dairy profit is being developed and it appears a lot of it is at the processor – retail level, not at the farm gate. If we can put pricing mechanisms in place that moderate that, then prices can be pulled down for consumers. A GST drop would help at that level as well, as the retail prices quoted invariably include GST, so comparisons with farm gate prices (which probably excludes GST)are not quite on a level. Returns to farmers need to be adequate for them to survive while treating their animals ethically and the land in an environmentally sustainable way. If we want dirty rivers, poor worker conditions and animal welfare issues, then keep returns to farmers down. If we want to get better compliance with a rural smile then make sure family farmers can get fair returns and put the pressure on retail pricing and get Fonterra’s elite management to look at producing a better product. Less litres but better export value litres with more nutritional value and less environmental and animal harm.

  8. A notable thing about pricing is the difference between brands. Given they are all claiming that increases in prices are related to the same market forces/export value – why is this?

  9. Alex,

    No local enterprise willing to take an independent retail in Palmerston North?

    If the locals mobilised into cooperatives, their buying power and choices would greatly increase with a corresponding decrease in costs.

    What it takes is organisation and that is best started with immediate families (or fellow university students) members.

    Distance is no problem, many of the South Auckland food enterprises would happily supply a cooperative at a decent rates.

    Has anyone asked what is possible?

  10. surely you cannot use vegan and feast in the same sentence 😉 and I doubt i could convince a 9 year old to eat vegan. it’s not really very practical when you have kids.

  11. We don’t all live in Auckland where you have a vast swathe of independent outlets. Here in Palmerston North, we have one that I can think of, and even they sell fonterra milk.

    How about you think of policies for the rest of New Zealand, not just Auckland. That is New Zealand’s problem. We dont all live north of the Bombay Hills.

  12. I’d suggest that for consumer goods, in the absence of other factors, the manufacturer getting about a third of the price of the retail price goods is about normal, with a third going to distribution and a third going to retail.

  13. Todd,

    I dont know where you live but here in deepest darkest South Auckland (Manurewa) we have a multitude of independent outlets.

    As I said I can buy any dairy product from cheese to yoghurt to milk from an independent retailer.

    Do you see much Australian meat on the shelfs’ where you are? There is heaps here even in the local New World (have to go there to get the cheap ginger beer to add to the rum).

    If it is too “hard” for consumers to get organised then pricing will always be at the whim of the supermarkets and producers.

    We run a small family cooperative and buy in bulk to distribute within the immediate family.

    Often have to go and pick up raw materials in East Tamaki and call in with the family order at the YNOT shop. Have a fridge in the back of the station wagon to keep the milk, ice cream, etc. cold.

    Same with potatoes, carrots, vegetables, etc. What we dont grow we buy in bulk and distribute.

    Sunday bought 3 medium sized pumpkins for a dollar and some very large kumara another dollar. Pumkin/Kumara/Ginger soup is in the deep freeze ready for winter meals.

    There are many ways to be green and being in a cooperative is one of them.

    BJ has it right, we pay world prices for commodity produced on NZL farms.

    Best situation would be for the Greens to allocate a subsidy for local milk consumers in their pre election shadow budget.

  14. It is an “interesting” conundrum Gerrit. The farmers shares coming out of Fonterra, are the end result … bonus or disaster for the individual farmers. They rely on that payout. As a cooperative they are working hard to maximize it, and that process, by way of the market, serves ordinary folk in NZ fairly poorly.

    If 95% of milk product is exported, the notional loss of setting aside an amount of product adequate to serve the needs of NZ at some cost-plus level and allowing the rest to be exported, might be reasonable. It is a form of tax in some indirect way, and has to be considered so with some abatement given somewhere else in the system, but the expense of cheese and milk and butter here is entirely absurd given that what is consumed here need not travel across oceans.

    To set up competition with fonterra seems wasted effort.

    The problem is that as consumers we are competing with people who are not in this country for the product. It is another “abuse” of the same sort that comparative advantage suffers from , but the cure may not be entirely market driven.

    respectfully
    BJ

  15. Gerrit!

    Bottom line is, support the independent retailer and farmers markets (bought a nice jar of plum and rhubard jam for $3.00 in Clevedon on Sunday) at ALL time and get the savings for quality goods.

    Yeah! Love farmers markets. But even supporting them isn’t going to stop a monopoly making our milk prices excessive. There are health benefits from un-pasteurized and non-homogenised milk to consider, but I have never seen milk sold at a farmers market.

    I would have thought the farmers as shareholders where the biggest benificiaries of the fonterra largesse. Farmers earn, pay the taxes (as do the directors on their retainers) and generate income for the government to distribute.

    Fonterras dominance helps to keep prices inflated, but because farmers don’t have much of a choice as to where they sell their product, Fonterra can set the price it pays. Being a shareholder would only rectify this slightly.

    So how come no one has starting importing milk and dairy in large quantities from overseas?

    I would presume that there is an agreement on pricing which would negate any financial advantage to importing milk products. The price of oil and distance would also determine how cheaply this can be achieved. Presently I believe we’re paying an inflated price based on actual cost overseas including transportation.

    The answer lies not in regulation but in the consumers hand. Look for cheaper and better alternatives at independent retail outlets.

    They currently do not exist enough to make a difference Gerrit. Such ideas are nice but will not break the monopoly.

    The power lies in the consumers hand, not the supermarkets. It is just that we very easly give away the power we have for the sake of convenience.

    I fail to see the relevance of creating further outlets and the infrastructure this entails when it already exists and regulation would be most effective in providing the consumer a product more relative to its cost to produce.

  16. The government should break Fonterra up, and regulate the market.

    be an interesting Greens election policy.

    Fonterra ia owned by the farmers as a coop. How do you break up a coop?

    The only people who benefit from Fonterra being the size it is, is the board of directors.

    I would have thought the farmers as shareholders where the biggest benificiaries of the fonterra largesse. Farmers earn, pay the taxes (as do the directors on their retainers) and generate income for the government to distribute.

    The ordinary New Zealander suffers massive hikes in dairy products,

    So how come no one has starting importing milk and dairy in large quantities from overseas?

    The demand is there, the pennies are in the consumers pocket, so why are we (even the government say) not brave enough to front up with the cash to import cheaper products?

    Maybe they are not as cheap overseas as we think?

    The answer lies not in regiulation but in the consumers hand. Look for cheaper and better alternatives at independent retail outlets.

    Another option is for consumers to form coops (very popular directly after WW2 in Europe) and buy in bulk for better price. If supermarkets can club together so can consumers.

    The power lies in the consumers hand, not the supermarkets. It is just that we very easly give away the power we have for the sake of convenience.

  17. I believe there would be a clause in in the contract which stipulates against such a practice.

    There is nothing to stop a farmer selling his fonterra shares, starting his own cooperative dairy factory and selling milk.

    In fact I dont think he/she even need to sell their shares.

    But someone with knowledge of the fonterra set up in regards coop ownership can better inform us.

    I have seen in independent retail outlets here in South Auckland selling alongside Australian beef, a trickle of Australian milk.

    Competition may not be far away.

    Pricing was as expected just below the NZL supermarkets (much like the Australian beef prices).

    We buy real yoghurt (greek, moroccan style – no sweet fruit flavoured rubbish) for $2.50 per litre at independent retails shops.

    Made in Mangere from possibly imported milk.

    Bottom line is, support the independent retailer and farmers markets (bought a nice jar of plum and rhubard jam for $3.00 in Clevedon on Sunday) at ALL time and get the savings for quality goods.

  18. Farmers are way too busy to set up alternative dairy’s. And fonterra would just price them out anyway. The government should break Fonterra up, and regulate the market. The only people who benefit from Fonterra being the size it is, is the board of directors. The ordinary New Zealander suffers massive hikes in dairy products, which are necessary parts of a healthy and balanced diet, especially for children.

    How else are we supposed to make dairy affordable in a country which produces so much? It is a major flaw in the free market system.

  19. I’m not sure it is as easy as you make out Gerrit. I believe there would be a clause in in the contract which stipulates against such a practice. A 60% mark up does seem rather excessive. Lets say 10% transportation and processing and 2% packaging, that’s 58% straight profit that goes to the middle man.

  20. More transparency is indeed required for if farmers are only getting 30% off the retail price of milk, but it raises the question why are they not setting up new cooperatives to collect, process and market their own milk?

    No law against that.

    Plenty of independent retail outlets aside from the supermarkets where they could sell their milk.

    My guess is if this were to happen the supermarkets would quickly start a lost leader milk war (like in Australia) to kill the independent farmers coops.

    Best pricing will only come about when farmers get keen enough to set up a new, independent from Fonterra, fresh milk supply cooperative and battle the supermarkets in an independent supply chain system.

    No amount of state price setting will reduce the price of milk.

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