Prices and scarcity: Milk

I see I see, Fonterra and supermarkets have decided to freeze the price of milk.

Now if that is what they want to do, I’m sure they have good reason.  However, lets all remember one thing:  if Fonterra decides to sell milk in NZ more cheaply than it does overseas it is taking a litre of milk that would have been more highly valued by a non-New Zealander and giving it to a New Zealander.

There is no free lunch.  If we were to force Fonterra to do this transfer we are not only transferring funds from farmers to domestic consumers – we are taking away the value that would have been created when Fonterra sold the milk to someone who genuinely values it more highly than the domestic consumer does.

Now Fonterra appears to have done this voluntarily (although who knows what pressure there was in the background), so I am sure there is some sort of … reason.  Still, lets not take this as a indication that price freezes, or closing off from international markets, is a good thing.

  • I suspect it’s a similar tactic from Fonterra that the utilities companies in the US (or any crony capitalist economy) routinely use: namely, be seen to voluntarily tow the Government line in order to either avoid the legislating away of their monopoly, or, at the very least, to stop a central government pricing control being forced on them so setting a precedent.

    Just politics, and serving to show how far we are from having a free economy.

  • Horace the Grump

    I think you will find there is currently a review of the dairy restructuring act that creating Fonterra underway… So it could quite easily be a case of the company making sure that there is nothing going on that would aggravate politicians about its activities in an election year…

    I also see the deadweight loss to the economy from this move, but Fonterra clearly sees a risk to its long term future if it raises the hackles of the electorate at a time when its legislative ‘licence’ is being reviewed by Govt….

  • JC

    So what happens to the freeze if the export price falls below the domestic price?

    JC

  • @Tribeless

    @Horace the Grump

    I also suspect a politically motivated move from Fonterra in this instance. But there is no doubt it is possible to spin an economic case if we try hard enough … a mix of reputation effects and cross-subsidisation through the price of other products methinks.

    @JC

    That is an interesting point. Would the supermarkets try to import milk from overseas, or does Fonterra have sufficient networking ability to keep in a premium? If they do – wouldn’t that premium already be in the price? If so, we would expect Fonterra to cut prices to avoid foreign entry.

    Will be interesting to see. I would expect food commodity prices to peak fairly soon.

  • I suspect Fonterra decided the damage to the brand from continuing rising prices would be greater than the cost of a price freeze.

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  • I’ll play devil’s advocate. Tyler has Tyrone; here’s Ehrlich to the usual Eric.

    Sure, it’s crazy to compare NZ fluid milk prices to US prices. First off, NZ prices for everything are more expensive. So it’s no surprise that NZ fluid milk is more expensive than US fluid milk. Moreover, the American dairy compact system with market orders on pricing results in fluid milk selling very cheaply while milk products like ice cream, cheese and baby formula sell for more than they do here in New Zealand – baby food in particular is twice the NZ price.

    But fluid milk is cheaper in Australia than here. And other grocery prices there are about in line with grocery prices here – compare woolworths.co.nz with woolworths.com.au. Pick a random aisle. Most stuff’s about what we’d pay here once you factor in exchange rates. But milk is cheaper there. Only difference is Fonterra. Usually we’d say something like economies of scale in processing and distribution. But there’s no reason to expect those would hit us worse in town milk than in chicken; chicken prices are similar both sides of the ditch.

  • @Eric Crampton

    Of course, the elasticity of demand for chicken is higher than that for milk – so we would expect any differences in scale and processing to come more fully through prices for milk, and more fully through quantities when it comes to chicken.

    Also, the law doesn’t prevent entry into the milk market from foreign providers right – so the potential for entry severely limits Fonterra’s ability to extract rents from the domestic economy.

    Finally, in Australia there have been concerns about milk and there has recently been a “price war” with supermarkets using milk as a loss leader – in this context we can’t really compare milk prices between countries.

  • @Homepaddock

    Indeed. However, I’m not really sure how much of a premium is paid on the brand within NZ in the first place – but that is definitely the way they would have seen it.

  • @Matt: Excellent. Now that’s the part that needs to be added to your post.