Friday, April 15, 2011

Underthinking the Price of Milk

 So tonight for some unknown reason I decided to watch Campbell Live. Campbell Live is the tabloid of NZ TV, the guy picks a crusade and harps on about it for months at a time. Last year it was Brian Tamaki.

I am sorry BISHOP Brian Tamaki
The thing is John Campbell never actually has a story he just whines about inane things and because he is so excited people think he is actually telling them something. His interview tactic involves him yelling his opinion over the guest he has on, how this guy remains on TV as a respected interviewer/journalist/presenter is beyond me.

"And I would say to you, Oi Campbell NO, you are a hopeless presenter"
Anyway John's latest crusade is against the price of milk in this country. Now I understand that Milk is expensive, but there is no rort going on, no one is making more than they should off the product. On his own story tonight, we got told that the $4.80 2L bottle of milk can be split into the following components.

$1.39 for the Farmer.
A good thing too, Tractors aren't cheap.
$1.36 for Fonterra

How Campbell sees Andrew Ferrier (CEO Fonterra)
$1.73 for the Supermarket

No wonder this little man is so happy.
$0.72 in GST

"So, we take 0.72 cents every time someone buys 2L of Milk, that's awesome"
I mean this breakdown seems pretty legitimate to me, yet John Campbell claims we are paying too much for milk, where exactly does he see the cuts to the price coming in?
The Farmer? Out of that $1.39, he need to buy his cows, service his machinery, feed his cows, pay off debt he probably has from the land, irrigate, and pay his Carbon tax in 2012. I am not sure he can shave too much off that $1.39.
Forget the tractor if we cut the costs there.
How bout Fonterra surely they don't need that whole $1.36, those greedy bastards! No its not like thy have to go pick up the milk from all around the country and with the cost of petrol these days that is not cheap, process the milk, package the milk, then distribute the milk.

With the price of Petrol, that $1.36 probably goes into gas money.
How about the supermarkets? Well they need to store the milk, they need to pay the guy to put the milk on the shelf, they have power bills. I mean sure most of the costs aren't entirely reliant on milk sales, so there probably could be some cuts here, but this isn't who John decided to attack, no the evil Fonterra, and farmers they are the greedy ones. But even if the supermarket could cut costs, it would it would probably bring the cost of milk down by $0.10, which probably isn't going to make a huge difference to household budgets.

With all his savings on Milk, Maurice could finally afford to live large.
The GST component, is another area I guess for cuts, but things get rather complicated when you start having variable GST on different products, so I will avoid discussing this.
The other thing that gets me, is John is unhappy paying $4.80  for this product, that has so much go into it, where the processing is expensive. But I bet he is happy enough paying $2.50 for a 750 ml bottle of water.

This is all that is required to get water to put in bottle
Seriously, turning on a tap is slightly less complex than farming animals, to produce milk, but John Campbell has no issues with the mark up on this product does he?
 John Campbell wears shoes and clothes, that are probably manufactured by some poor Chinese kid for about $2 at cost, but yet sold to the consumer for prices well into the hundreds of dollars, why is there no stink being kicked up about this markup? Some people are getting very rich off these products.

Put it this way, I don't think Fashion people are concerned about the price of milk.
 I seriously wonder about people in this country sometimes, they seem to live in a fantasy land, where milk comes from nowhere, with no work required to produce it, so can't understand why isn't given away for free. 

"What do you mean manufacturing and distribution costs?"


  1. Dear Aaron
    I really like your blog. You keep shit real.
    Kind regards
    Liz Triceratops

  2. Why is milk so cheap in other (wealthier) countries then?

  3. Fonterra has to export a fucktonne of dairy products to cope with international demand. This is based on specialisation. To protect domestic industry in the countries we export to, tariffs are often imposed which distorts the trade pattern. Inefficient producers are protected so we have to export our milk at a lower cost. Often, trade unions are created and tariffs are eliminated within union members, and trade is diverted. This makes production of diary overseas gradually more productive. When comparing prices overseas, I feel as though people forget to look at purchase power parity. We should consider ourselves fortunate that we get cheap imports, but with that we have to pay higher prices for goods we export. The milk that is not produced by Fonterra in NZ (10%) isn’t even sold to the local market because it isn’t financially viable.

  4. @Liz Cheers.

    @Ryan What she said, people underthink it, they just look at the end prices and go ours is more than theirs that is not fair. Forgetting about tariffs, government subsidies to their local farmers (not NZ), the fact other countries have more than two supermarkets, where the real price is being put on, and also a lot of countries don't have a GST on their milk.

    As Liz also said, the competitors to Fonterra, and they exist don't sell their milk in NZ, because at the current prices they can't afford it.

  5. I just wrote a huge and comprehensive rebuttal of your argument Azza, but blogger lost it all. Feck.

    Suffice it to say that:
    a) calcium is a dietary necessity
    b) milk is far and away the best dietary source of calcium
    c) NZ is starting to have health issues around calcium deficiency
    d) Remove the "farmer" component and milk is still orders of magnitude more expensive than fizzy-pop
    e) That extra expense is atributable monopoly pricing by Fonterra and supermarkets
    f) It's not Fonterra's fault that world dairy consumption is outpacing world dairy production
    g) That doesn't mean we shouldn't do something to make milk & other healthy foods more affordable than fizz and other shitty foods. Remove GST on milk and fresh produce, for instance.
    h) It's a bit of a nonsense to separate "farmer" and "Fonterra" costs when Fonterra is a wholly farmer-owned Co-op, and all profits go back to farmers.

  6. a/ b/ c/ Have nothing really to do with the price. Its not like Milk is $40 a litre or something, it is $3-4 which most people with a little rejig of their budget could afford.

    d/. That's because Milk is a superior product. I mean a BMW 330d has better fuel economy than a Ford Falcon, therefore I expect to pay more.

    e/ Fonterra doesn't have a monopoly, 10% of the milk in this country is produced by other companies but they don't see it commercially viable to sell in this country. The fact Fonterra is such a large company probably keeps milk prices down.
    The point you get right here is the duopoly of the supermarkets, that's were the real margins are being made.

    f/ Agreed.

    g/ Yeah I kind of think that is an area to look into, But it is more complex than just saying remove the GST. It would increase compliance costs. And removing GST from milk will only save you 72 cents.

    h/. Yeah poor wording on my part. Farmer = Producing Milk, Fonterra = Processing Milk.

  7. Also on f/ g/ Argentina tried to set domestic milk prices 4 years ago. The companies decided to export more, because the world price was better, so Argentina had to increase export tax bankrupting the comapanies....

  8. a/b/c/ I think you're out of touch with reality Aaron. Dairy prices are the main driver of food cost increases. Increases that are not reflected in rising incomes for low-income New Zealanders. Increasingly, the most vulnerable people in our society have poor access to healthy food, including milk and dairy products.
    d/ I call bullshit. Your argument in the blog is that the price of milk is driven by costs at the production and processing phases, and the profiteering is coming from the distribution phase. If we take production out of the loop, why can't Fonterra put milk on the shelf for a similar cost to, say, coca-cola? I'd argue that it's lack of competition, not product quality that is the main economic difference. Which brings us to...
    e/ f/ So what you're saying is that 1) 100% of the milk available domestically is supplied by Fonterra; 2) the economic barriers to others entering the market prohibit competitors from joing the domestic market? Fonterra absolutely has a monopoly. The main reason for that is i) because the government overruled the advice of the fair trade commission to allow the formation of Fonterra in the first place; and ii) because of f/ making it just as profitable to take the milk overseas.

  9. g/ how would g/ increase compliance costs? Dairy processing is already pretty highly regulated, and the ingredients are already listed on teh bottle and tested regularly. Seems to me the work's already being done. It's a win/win. When, as a young family, you go through 10+ litres of milk a week, $0.36/litre is a significant saving, and would bring milk back to the place where it is an economically viable alternative to fizz for low-income families. The other approach would be a "luxury tax" on foods that will eventually kill you, but that's where your compliance costs would kick in.

    Perhaps we need to separate out the two issues - whether or not milk prices are unfair; and whether or not, as a nation, we think it's acceptable for some of our population to lack access to basic nutrition.

    From an economic sense, you can make a pretty strong argument that milk prices are a fair market price. From an ethical/social sense I'd argue all day long that access to milk is more important than economics.

  10. You keep comparing Milk to Coca Cola, and saying that you should be able to access them for the same price. But the fact is as you point out Milk contains a whole lot more nutrients and things good for you than Coke. Milk is more of a meal, than a drink.
    If you were to compare like with like, what about Dairy milk ($2.40 a litre) to Soy milk ($3.40 a litre). You still are winning with Dairy.

    The compliance cost come in from having to hire people to decide what is fresh food? How much percentage fresh/healthiness do you require to be eligible for having no GST on your product?

    Valid point, about separating issues. I think everyone should be able to drink milk (and maybe as a single man I am out of touch with what families can afford and I concede that point).

    The reason the others don't join the market is because if they sold their milk cheaper than Fonterra they would go bankrupt. Fonterra formation is better for the country as a whole, because it allows us to compete on a world market, and it pretty much drives our economy...

  11. Oh dear god, will people stop harping on about dietary calcium? Yes, calcium is an important nutrient but, you know what? So is iron, especially in pre-menopausal women. Iron deficiency is the most prevalent nutrient deficiency in the world. Why? People eat shit processed foods. So is folate. Not just in pregnant women, but increasingly in adolescents too, which has been proven in a couple RCTs to impair cognitive functioning, as is the case with Iodine, but iodine is STILL not a required additive in salt processed food, so the majority of New Zealand's salt intake is non-iodised. Folic acid fortification epically failed because the companies kicked up a fuss. How about vitamin B12? Somewhere between 20-40% of older adults have insufficient levels of vitamin B12 and suffer massive gastrointestinal absorbancy difficulties, resulting in other micronutrient deficiencies and shit QoL as a result, not to mention early onset dementia.

    The only effing reason people think that calcium is the be all and end all of micronutrient intake is marketing from our very strong dairy industry. In fact, a massive meta-analysis, the Cochrane review, showed that the difference in bone density between those with sufficient calcium intake as per recommendations (1000mg/day, which, by the way, only adolescent males and infants meet, according to the last 8 years of NMInistry of Health dietary survey data) was one percent. ONE PERCENT! The difference between those with sufficient vitamin D or not was ten times greater. The difference between those taking sufficient exercise was 15 times greater.

    In conclusion, people eat shitly. Yes, lowering the GST on healthy foods would be loverly, but that has eff all to do with milk and even less to do with Fonterra. Coke is a lot cheaper than milk because it is ridiculously easier to produce and has much stronger market appeal. It is a completely shit choice of drink to feed your kids, but then again it is also shit to let your kids watch tv, to let your kids second-hand smoke, to let your kids have unprotected sex, to let your kids eat deep fried shit.

    Our job as health professionals is to enable people to make healthier choices. Yes, cost comes into that, but it is definitely not the only factor (as Azzy says, water is, in fact, free) and wanking on about calcium is not doing you, Fonterra, or science, any favours.

    How about taking the stairs next time, not buying that cheeseburger, not drinking that pepsi, buying some fresh veges from the farmer's market and biking into work on a nice day?

    Ruby Subtlety.

  12. PS Liz you are such a babe. I love it when you get all intelligent and debatey. BAM.


  13. Woah, what a comment. I agree with pretty much everything you said, you basically said what I said but with more references and things to back them up.

    I just used a picture of a Milk tanker.

  14. Yes. I am good like that.
    Like a gay batman.


    Want to keep Underthinking? Try one these.