{"id":30426,"date":"2025-07-29T06:20:16","date_gmt":"2025-07-29T06:20:16","guid":{"rendered":"https:\/\/www.newsbeep.com\/uk\/30426\/"},"modified":"2025-07-29T06:20:16","modified_gmt":"2025-07-29T06:20:16","slug":"butter-wars-nothing-cures-high-prices-like-high-prices-but-will-market-forces-be-enough","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/uk\/30426\/","title":{"rendered":"Butter wars: \u2018Nothing cures high prices like high prices\u2019 \u2013 but will market forces be enough?"},"content":{"rendered":"

According to Stats NZ, butter prices rose by 46.5% in the year<\/a> to June and are now 120% higher than a decade ago. The average price for a 500g block is $8.60, with some local brands costing over $10.<\/p>\n

But solving the problem is not a matter of waving a magic economic wand. Several factors influence butter prices, few of which can be altered directly by Government policy.<\/p>\n

And the question remains \u2013 would we want to? Proposals such as reducing exports to boost domestic supply, or cutting goods and services tax (GST) on dairy products, all carry consequences.<\/p>\n

A key factor driving butter prices in New Zealand is that 95% of the country\u2019s dairy production is exported<\/a>.<\/p>\n

AdvertisementAdvertise with NZME.<\/a><\/p>\n

Limited domestic supply and strong global demand have pushed up prices for a range of commodities \u2013 not just milk, but beef as well. These increases are reflected in local retail prices.<\/p>\n

Another contributing factor is the rising costs along the supply chain. At the farm level, producers are receiving record prices for dairy. But this comes at a time when input costs have also increased significantly. It is not all profit.<\/p>\n

Weighing the options<\/p>\n

Before changing rules around dairy exports, the Government must weigh the broader consequences.<\/p>\n

On the one hand, high milk prices benefit \u201cNZ Inc\u201d. The dairy sector accounts for 25% of exports and employs 55,000 New Zealanders. When farmers do well, the wider rural economy benefits \u2013 with flow-on effects for the country as a whole.<\/p>\n

On the other hand, there is the ongoing challenge of domestic food security. Many people cannot afford basic groceries and foodbank use is rising.<\/p>\n

So how can New Zealand maintain a food system that benefits from exports while also supporting struggling domestic consumers?<\/p>\n

One option is to remove GST from food. Other countries exempt dairy products from such taxes in an effort to make staples more affordable.<\/p>\n

This idea has been repeatedly reviewed and rejected \u2013 including by the 2018 Tax Working Group. In 2024, it was estimated that removing GST could cost the Government between $3.3 billion and $3.9b, with only modest benefits for the average household.<\/p>\n

Fonterra or supermarkets?<\/p>\n

Another route would be to examine Fonterra\u2019s dominance in the supply chain. There are advantages to having a strong global player. And it is not in the national interest for the company to incur losses on domestic sales.<\/p>\n

Still, the structure of the market may warrant scrutiny. For a long time there were just two main suppliers of processed dairy products \u2013 Fonterra and Goodman Fielder \u2013 and two main retailers \u2013 Foodstuffs and Woolworths. This set-up reduced the need to compete on prices.<\/p>\n

AdvertisementAdvertise with NZME.<\/a><\/p>\n

While there is arguably more competition in the manufacturing sector now, supermarkets are still under scrutiny and have long faced criticism for a lack of competition.<\/p>\n

The opaque nature of the profit margins across the supply chain also fuels suspicion. Consumers know what they pay at the checkout and what farmers receive. But the rest is less clear. This lack of transparency invites speculation about who benefits from soaring prices.<\/p>\n

In the end, though, the Government may not need to act at all.<\/p>\n

As economists like to say: \u201cNothing cures high prices like high prices.\u201d While demand for butter is relatively inelastic, there comes a point at which consumers reduce their purchases or seek alternatives. International buyers will also push back \u2013 and falling global demand may redirect more supply to domestic markets.<\/p>\n

High prices also act as a signal to producers across the globe to increase production, which could happen relatively quickly if there are favourable climatic and other conditions.<\/p>\n

We only need to look back to 2014, when the price of dairy dropped by 48% over the course of 12 months because of reduced demand and increased supply, to see how quickly the situation can change.<\/p>\n

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