Cheese prices: Competition issues or random bleating?

This article from David Hargreaves on cheese prices got me thinking. He is saying that domestically produced food prices are too high.

At first I completely disagreed with, especially when he says things like:

There’s no doubt the excuse will come out about how much lower the Kiwi dollar is this year. And clearly that is a valid excuse when you talk about imported goods. But what about the goods produced at home?

This is a misnomer – as a lower exchange rate increases the return New Zealand exporters can get overseas, increasing the price New Zealander’s need to pay for a product.

However, there is another issue regarding the price of diary products in New Zealand that is important – and where the bleating about the price might make some sense: Collusion in the supermarket industry. If supermarkets are colluding on the price of diary products, the price would be higher than the socially optimal level. In this case there might be a competitive issue with supermarkets.

Do you think there is a competition issue – or do you think this is a whole lot of bleating about nothing?

  • The price of raw milk is lower than it was a year ago so if anyone is creaming it with dairy prices it’s those beyond the farm gate. Other primary producers also complain that supermarket prices are much higher than the returns to growers, even when transport, processing where applicable, and other costs are taken into account.

    Is it only dairy prices where there’s a suspicion of collusion or does it happen with other products?

    Collusion is anti-competitive and – I think – illegal – but monitoring comeptitors’ prices and setting yours based on what you learn from that probably isn’t and would have a similar affect.

    P.S. “a whole lot of bleating about nothing?” – should that be mooing?

  • “Is it only dairy prices where there’s a suspicion of collusion or does it happen with other products?”

    It is over a range of issues – but tacit collusion (which is the sort of collusion firms do without breaking laws) is more likely to occur in a case where prices have been pushed up strongly. It prevents them from falling back.

    “but monitoring comeptitors’ prices and setting yours based on what you learn from that probably isn’t and would have a similar affect.”

    Indeed – that is a big part of tacit collusion. It is a very interesting issue – we should have some blog posts about how (we think) it works sitting around.

    “P.S. “a whole lot of bleating about nothing?” – should that be mooing?”

    I was a bit worried about using a lamb reference when talking about cheese – mooing would have been a better fit 😉

  • If the price of cheese goes too high, I know what to do. I stop buying it. I’ll probably live longer anyway.

    I like cheese, but I don’t need to eat it I think I’m being rorted on the price. I already avoid the 900gm blocks on the basis they are misleadingly hoping to be mistaken for 1KG blocks with a lower price.

  • When I came back to NZ from Australia five years ago I was shocked to find dairy prices were 20 to 40 percent higher here in milk-rich New Zealand than over there.

    And in some cases we are talking about the price Australian consumers pay for NZ products. OK, no GST on food may account for SOME of this, but what about the rest. It can’t be cheaper to get cheese from the paddock to Sydney than from the paddock to Auckland.

    Things don’t seem to have changed much. At Aldi, milk is 2.17 for 2 litres. I can’t buy one litre for that price in Auckland even when the exchange rate is taken into account.

    http://www.aldi.com.au/au/html/product_range/2744_7240.htm

    So if the farmers aren’t, er, milking it, who is?

  • “I like cheese, but I don’t need to eat it I think I’m being rorted on the price. I already avoid the 900gm blocks on the basis they are misleadingly hoping to be mistaken for 1KG blocks with a lower price.”

    I’m not such a big fan of cheese – I like milk though ..

    Interesting example of assumed fairness in your utility function – definitely an important issue

  • “When I came back to NZ from Australia five years ago I was shocked to find dairy prices were 20 to 40 percent higher here in milk-rich New Zealand than over there.”

    If dairy products are a homogeneous good, and prices are sufficiently different (accounting for transport etc) then it must be the case that somewhere “down the line” involves different competitive pressures.

    This does not necessarily mean that supermarkets are extracting rent – for example supermarkets have large fixed costs and experience increasing returns to scale. As a result, dairy product prices may end up cheaper in Aussie because supermarkets are spreading costs over a larger number of products (or have lower marginal costs for each unit they move).

  • steve

    well how about this? the supermarkets (or at least providers to supermarkets) only need to charge 1c less than the world price + transport costs. Even though it is produced domestically, it includes transport costs because that is what a competitor would have to charge to cover costs when competing with domestic production. therefore we have higher prices because NZ is so isolated from the rest of the world. forget that we produce it ourselves, we have little competition because foreigners face very high costs to bring produce to NZ.

  • Hi Steve,

    That is true – however, it still implies that differences should be accounted for by the transportation cost, as we have mentioned above, not by an even greater margin. The fact that overseas suppliers would supply if the price was great enough implies that there is still “effective competition”. (Also note that transport costs have fallen SHARPLY recently inline with the decline in spot prices – and we are discussing why prices haven’t adjusted downwards at all).

    If it is the case that, taking into account transport costs, final prices in NZ are higher then the issue must be further down the supply chain – not at the farmers end.

    Of course – we have to ask:

    a) is this the case?
    b) if it is – do we think it will remain in the long-run, or is it transitional.

    I can see (a) being true – but I think that for (b) the current margins are only transitional. This is all wild conjecture though – I was just wondering what your guys opinions were.