Butter wars: nothing cures high prices like high prices

With much talk about the soaring cost of butter in New Zealand, Lincoln University Professor Alan Renwick explains on The Conversation why prices are currently so high and what tools could be employed to bring prices down. 

The alarming rise of butter prices has become a real source of frustration for New Zealand consumers, as well as a topic of political recrimination. The issue has become so serious that Miles Hurrell, chief executive of dairy co-operative Fonterra, was summoned to meetings with the government and opposition parties this week.

After meeting Hurrell, Finance Minister Nicola Willis appeared to place some of the blame for the high price of butter on supermarkets rather than on the dairy giant.

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

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.

And the question remains – would we want to? Proposals such as reducing exports to boost domestic supply or cutting the goods and services tax (GST) on dairy products all carry consequences.

A key factor driving butter prices in New Zealand is that 95% of the country’s dairy production is exported.

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

Another contributing factor is 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.

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