This is from an email exchange between Agnitio and myself on why dairy prices rose, following his post on Fonterra’s auctions:
A few reasons:
- Sharp increase in demand in Asia and the Middle east as a result of rising incomes (and dairy products are a normal good),
- Drought in Australia and a drop in production over the Americas,
- Increase in the price of feed stemming from biofuel’s sucking up grain (good for NZ as we grass feed cattle – increasing our comparative advantage),
- Sharp rise in the price of other inputs (fertilizer and fuel),
- Sharp increase in shipping costs.
All these things combined to see dairy prices increase 200% odd in a couple of years 
Note, all these factors have decreased somewhat, which is why spot prices have fallen like 50% over the past year. To figure out where prices will settle we need to ask two questions:
- What shifts are permanent?
- What does the long-run supply curve (and long-run demand curve) look like?
2 comments
3 pings
SimonD says:
November 28, 2008 at 12:03 pm (UTC 12 )
Well if you’re a believer in Peak Oil – then fuel and fertiliser costs will increase substantially in the medium to long term.
Matt Nolan says:
November 28, 2008 at 12:17 pm (UTC 12 )
“Well if you’re a believer in Peak Oil – then fuel and fertiliser costs will increase substantially in the medium to long term.”
Very true – which would support “higher prices” and may actually benefit countries that use less fertilizer and fuel in the production process (would New Zealand fit in this?)
» Thoughts on the price of milk « The visible hand in economics says:
November 28, 2008 at 2:25 am (UTC 12 )
[...] This is from an email exchange between Agnitio and myself on why dairy prices rose, following his post on Fonterra’s auctions :. A few reasons:. More [...]
» Thoughts on the price of milk « The visible hand in economics says:
November 28, 2008 at 2:34 am (UTC 12 )
[...] This is from an email exchange between Agnitio and myself on why dairy prices rose, following his post on Fonterra’s auctions:. A few reasons:. Original post [...]
Milking the Declining Price of Dairy Products says:
January 3, 2009 at 12:33 pm (UTC 12 )
[...] Thoughts on the price of milk | TVHE [...]