Butter buyers flinching at $8.60 for a 500g block are unlikely to see this dropping any time soon as Fonterra glimpses more international demand ahead and dismisses talk of discounts or a two-tier system.
The high cost of butter on supermarket shelves in a nation with 5million cows has perplexed shoppers struggling to afford the dairy product.
The price of butter is about 60% higher than a few years ago.
Finance Minister Nicola Willis quizzed Fonterra chief executive Miles Hurrell about high prices at a meeting on Tuesday.
Yesterday in Christchurch, Mr Hurrell opened up on where the dairy giant saw the international butter market and clarified butter pricing publicly following the “constructive” meeting.
Mr Hurrell said the co-op had been transparent that the butter price was driven mainly by international markets and determined by international prices.
He was comfortable with the price level as the co-op’s job was to bring in as many overseas dollars from the international market so it could recycle within the economy.
The down side was New Zealand and international consumers had to pay more for their butter, he said.
“We acknowledge and appreciate things are tough in the New Zealand economy right now. The cost of living — that is a topic of conversation we hear every day that is not lost on us. We understand and appreciate that, but when you get specifically to a block of butter you may buy at a supermarket roughly 80% of the price of that is determined by the international market … that has a growing need for both dairy fats and dairy protein.”
Any relief in the near future seemed unlikely with another forecast of a $10 per kilogram of milksolids payout for the 2025-26 season.
Mr Hurrell said it was too early to tell if butter prices would level out or rise further, but strong demand was still being seen internationally, particularly in China and Asia.
“You would have to say these butter prices we are seeing now are probably the highest we’ve seen in the international market for some time. Historically, we are a reciprocal business and, historically, we see that come off a bit. I don’t see any short-term position where we would see that playing out.”
Geopolitical and macro-economic issues on the global front made it difficult to gauge what lied ahead, he said.
The estimated $25 billion generated by Fonterra was helping New Zealand during an economic “slumber” as momentum was gaining for an export-led recovery.
“We have seen that play out particularly for butter prices where they are up by 60-odd percent, give or take. That is a good news story and it talks to the economic recovery I know the government has been talking about quite extensively.”
Butter sales contributed about 20% of the $25b turnover with about 95% of Fonterra products ending up on the international market.
He said the 5%-10% margin of the overall butter price referred to by the finance minister was not profit, but the cost and margins for everyone in the supply chain including retailers, processors, wholesalers and distributors for a bulk product sold internationally.
GST was on top of this, he said.
The finance minister is convinced supermarket competition is key to putting pressure towards lower prices.
Mr Hurrell said it was not the co-op’s business to comment on supermarket margins.
“I’ve heard about supermarkets discounting and I know some supermarkets talk about loss leaders in certain environments, but they make their own call and I don’t get involved in retail margins they do or don’t take across any of our product lines.”
Mr Hurrell said co-op revenue would flow back to 8500 farmers who would pass on their share within communities.
“I think we do a very good job of keeping our costs under control within the co-operative and pass on those costs [savings] to the consumer.
He said Fonterra had an obligation to sell dairy products domestically and internationally and support the local economy, but it was not its role to introduce a two-tier price system or discount butter.
Shoppers are still struggling to understand why a block of New Zealand butter is cheaper in Australia than here.
Mr Hurrell said there was a larger retailer base in Australia, but its milk price was also lower than ours and in the past year about 11 processing companies had closed which showed the difficulties within the market.
Farmers were aggrieved with some of the butter criticism, he said.
