Kiernan explains it \u201creflects a mixture of demand and supply factors, including lower dairy production volumes in the US, Europe, South America, and China\u201d as well as \u201ca sharp drop in Australian [dairy] production between 2021 and 2023 that has not been fully recovered from; and strong demand growth in Asia\u201d. <\/p>\n
\u201cWeather events, including both drought and periods of excessive rainfall, have been a contributing factor to many of the supply issues overseas. However, tougher environmental regulations, higher energy prices, and a bluetongue virus outbreak in late 2024 have also negatively affected European dairy production,\u201d Kiernan added.<\/p>\n
So a reduction in global supply, together with stronger demand, has pumped up the prices.<\/p>\n
Michael Harvey, senior analyst in dairy and consumer foods for Rabobank, makes similar points and highlights the rise in the cost of dairy products that New Zealand exports.<\/p>\n
\u201cIt\u2019s across all channels,\u201d he told the Herald. \u201cAnd it ultimately comes down to global prices\u201d. <\/p>\n
The reality is that New Zealand exports 98% of the dairy products it produces, Harvey says, and the country has a very large and very successful dairy industry. Because we export so much, our local prices are heavily affected by the demand in those export markets. In a sense, we are paying the price of our own success.<\/p>\n
New Zealand exports the overwhelmingly majority of the dairy it produces. Photo \/ NZME<\/p>\n
This morning, David Seymour told Herald NOW\u2019s Ryan Bridge that high butter prices are actually really good news for the economy<\/a>, and we should all be happy about the money flowing into farmers\u2019 pockets. <\/p>\n Is David Seymour right? <\/p>\n Yes, Kiernan says. \u201cThey are undoubtedly painful for consumers, but they mean that dairy farmers\u2019 incomes are increasing, which will help drive New Zealand\u2019s economic recovery over the next 18 months,\u201d he adds. <\/p>\n \u201cLow dairy prices (along with high costs) during 2022 and 2023 led to a pull-back in farm spending, hurting economic activity in provincial areas. Improving incomes will see more spending on farm supplies, equipment, and machinery, boosting economic activity and jobs in provincial areas.\u201d<\/p>\n Kiernan goes further and says that rising dairy prices are more important to the country\u2019s economic recovery than lower interest rates: \u201cIn our view, the lift in dairy prices, along with rising meat prices and high horticulture prices, is shaping as an even more important component of the economy\u2019s recovery than declining interest rates\u201d.<\/p>\n AdvertisementAdvertise with NZME.<\/a><\/p>\n Consumer NZ, however, said Seymour \u201cmissed the point\u201d with his statement.<\/p>\n \u201cOur research this month has found that 70% of New Zealanders rank the cost of food and groceries as a top three financial concern.<\/p>\n \u201cMost New Zealanders don\u2019t believe the Government is doing enough to keep food affordable \u2013 two-thirds of people said they have low confidence in current government policies.\u201d<\/p>\n They said the conversation about butter prices \u201covershadows\u201d the wider issue \u2013 prices are becoming unsustainable for more and more New Zealanders.<\/p>\n \u201cOf course, we should be focused on growing a high-wage economy to roll with global price spikes \u2013 but when this is contrasted with an increasing number of people who are struggling to pay for the basics, we question at what cost?\u201d<\/p>\n When can we expect butter prices to drop?<\/p>\n Let\u2019s start with the good(ish) news for consumers: international butter prices have been stabilising over the past couple of months.<\/p>\n AdvertisementAdvertise with NZME.<\/a><\/p>\n \u201cThere are expectations of improving supply conditions in Europe, in particular, that should help to alleviate some of the current mismatch between supply and demand. Growth in Chinese demand is likely to remain reasonably modest over the next 18 months, also helping to provide some relief in prices,\u201d Kiernan says.<\/p>\n The not-so-good news: The latest OECD\/FAO forecasts show only an 8% correction in prices between 2024 and 2026, which means there is no immediate relief on the horizon, as this will still leave butter prices higher than people were used to a few years ago. <\/p>\n The reason behind this, Kiernan says, is \u201cfurther growth in demand from India, Pakistan, the Middle East, and North Africa, which is expected to remain reasonably strong\u201d.<\/p>\n So the bad news for bakers, cakers and scone-makers: not only are butter prices not about to drop any time soon, they may actually go even higher. <\/p>\n \u201cThe full effects of international butter price rises through to May have probably not quite flowed through into retail butter prices in NZ yet, so there is still a near-term risk that retail prices could push a bit higher,\u201d Infometrics\u2019 chief forecaster says. <\/p>\n \u201cBecause we have yet to see any dip in international prices, it\u2019s too early to be certain about the timing of any reversal in retail prices, so it might not be until late 2025 or early 2026 that supermarket butter prices start to ease a little from current highs.\u201d<\/p>\n AdvertisementAdvertise with NZME.<\/a><\/p>\n Rabobank\u2019s Harvey agrees: \u201cWe are not expecting the global price to rapidly decline in the next six to 12 months, but there\u2019ll be some pressure. Relief is on the horizon, but there won\u2019t be a dramatic decline\u201d.<\/p>\n If you look at the Global Dairy Trade (GDT) as a global indicator of prices, these have fallen marginally in recent months, but are still very high, Harvey explains.<\/p>\n \u201cIt becomes a question of when we will see some correction,\u201d he adds.<\/p>\n How that correction will happen also depends on several factors. \u201cIt could be that customers just stop buying, because the price is too high, or a supplier response from manufacturers. You\u2019ll get a balance of that,\u201d Harvey says.<\/p>\n If it\u2019s a global issue, how can places like Costco sell cheaper butter<\/a> than anywhere else?<\/p>\n The question, Harvey says, gets complex when we try to do price comparisons across different geographies. \u201cThere\u2019s nuance around the retail structure in each market and there\u2019s variability in the category itself,\u201d he says, adding that there are \u201cexcluding mechanisms\u201d that could be at play. For example, some retailers could be buying on contract for a period of time, thus locking into a certain price for longer. <\/p>\n \u201cYou\u2019re never going to get them all to line up and agree on a price, but the reality is consumers in all geographies are paying more for butter.\u201d <\/p>\n AdvertisementAdvertise with NZME.<\/a>What other items on supermarket shelves could be set to spike in price?<\/p>\n Rabobank\u2019s Harvey says products like cocoa<\/a> and coffee beans<\/a> are \u201ccommodities to watch\u201d because, among other factors, there are current shortages that could affect pricing. <\/p>\n Canola oil is going through a similar cycle, he says.<\/p>\n What can the Government do about this?<\/p>\n Not much, apparently.<\/p>\n Willis met with Fonterra chief Miles Hurrell this afternoon about the dairy giant\u2019s pricing model.<\/p>\n As a result, Hurrell will publicly explain the different components of the price of butter, which Willis said will come later in the week.<\/p>\n Willis did say the Fonterra CEO blamed supermarkets for prices being quite as high as they are<\/a>.<\/p>\n AdvertisementAdvertise with NZME.<\/a><\/p>\n When asked whether anything raised in the meeting would lead to lower prices, Willis said, \u201cAll roads lead back to supermarket competition.<\/p>\n \u201cWhat Miles acknowledged, and what every New Zealander can see, is that supermarkets make choices about what margin they charge for butter. Now this is at the margin, it is a small proportion of the overall price that you pay, between 5% and 10% of the overall price shared between Fonterra and the retailer.<\/p>\n \u201cWhat is clear is that different retailers make different decisions about what margins they charge,\u201d Willis said.<\/p>\n Speaking to the Herald before the meeting, Harvey said there\u2019s \u201cnot much the Government can do\u201d in the short term as the Beehive is largely unable to influence global pricing. <\/p>\n There are some players along the supply chain who can have an impact, though. \u201cRetailers will look to trade down where they can. They are very mindful of this,\u201d Harvey says, adding that we should expect to see more \u201cpromotional activity\u201d that customers can take advantage of.<\/p>\n In summary<\/p>\nDeputy Prime Minister of New Zealand David Seymour says high butter prices are good news for the country’s economy. Photo \/ Michael Craig<\/p>\n
West Auckland wholesaler Costco has put purchase limits on its Kirkland Signature butter, restricting customers to 30 blocks at a time. Photo \/ Grace Xin Yin Wu<\/p>\n