Record price for dairy products – are the manufacturers ‘taking advantage’ of us

I fear that someone may look at the December PPI data and get a misleading impression about where the dairy money is going, this fear seems mildly justified by the tone of this piece by NZPA.

Looking at the December quarter figure by itself, we see a massive 15% increase in the price of manufactured dairy goods (the price dairy products are sold to clients of the manufacturer (eg supermarkets)), while the cost of inputs to the manufacturer rose only 0.8%. Furthermore, the price received by dairy farmers (where the income will be flowing in) only increased by 0.2%.

However, all this analysis misses out on the substantial movement in dairy prices in the September quarter. In September, the cost of inputs for dairy manufacturers rose 27%, while the price they charged only increased 8.2% – a change in margins that is unsustainable. During this point in time the price received by dairy farmers rose 29%, accounting for this significant increase in costs.

Taking these two quarters together we can see what has happened. The world price of dairy products has risen, thereby increasing the price farmers can get for their product – and the price manufacturers (who in Fonterra’s case is vertically integrated with them anyway) must pay for this product in order to create their own. Over time, the manufacturer has increased prices to take into account this increase in costs – and then supermarkets etc have passed this cost onto us as consumers.

As a result, todays data only tells us what we already know – the world price of dairy products rose, and so the price we pay for these products has increased. It does not tell us that dairy manufacturers are doing anything untoward, farmers are receiving the income associated with the higher world prices – something that should ultimately help the economy.