Inflation Nation: What's driving the cost of milk, cheese and butter and why we pay so much

The rising cost of living and the return of inflation is hitting Kiwis hard. In a new Herald series, Inflation Nation, we explore the reasons and impacts of the price shock - and possible solutions. We also share some great life hacks on how you can save money and live more affordably.

Kiwis are by now accustomed to price creep every time they visit the supermarket, with dairy product prices right up there in causing the most anguish at the checkout.

That's because dairy goods like milk and cheese are considered by many to be a diet staple.

A trawl of Statistics NZ food price index figures for the past year shows just why dairy prices have been plumping up the weekly household bill.

A comparison of food price index "selected monthly weighted average prices" between February 2021 and February this year shows:

• Two litres standard homogenised milk was $3.59 in February 2021; last month it cost $3.91.

• Butter 500g salted $5.17; last month $5.65.

• Cheese 1kg mild cheddar (supermarket only) $10.77; last month $12.23.

• Yoghurt 150g six-pottle pack (supermarket only) $5.10; last month $5.49.

This comes as no surprise to Consumer NZ chief executive Jon Duffy, who thought the rises, particularly for cheese, would be higher, given the price tag on a 1kg block of branded cheese has been known to nudge $20 depending on the cheese type and the store.

Duffy said the February price comparisons attest to "significant" increases at the dairy chiller.

But he points out that at 8.6 per cent up January year on year, the dairy price picture is not as bad as that for fruit and vegetables (up 17 per cent) and eggs (up 14.5 per cent).

Meat and poultry prices rose 7.5 per cent January year on year.

Whatever, as Duffy notes, it continues to be hard for New Zealanders to understand how they can be surrounded by dairy cows and still have to pay so much for basic dairy goods.

The fact is that the inflation in freight, fuel and transport costs currently hitting food prices is only a small part of New Zealand's retail dairy price equation.

The prices New Zealand dairy product earns on global markets has for many years influenced what New Zealanders pay at the grocery chiller. And global dairy prices - along with export meat returns - are currently booming. (New Zealand's dairy consumer market is so small that around 95 per cent of dairy processing is exported. There's no shortage of debate about how more local market competition might reduce prices at the checkout but as things stand export returns are a more attractive proposition for processors.)

To illustrate how global dairy prices can sheet back to the local consumer market, industry heavyweight Fonterra, for example, claims its New Zealand consumer product division Fonterra Brands NZ, has to pay the same price for milk as exported product fetches.

Another contributor to retail dairy prices is the margins set by supermarkets. (One local market food manufacturer told the Herald the margin supermarkets demanded was their biggest single cost, more even than their labour cost as a medium-sized employer.)

Again, zero surprise to Consumer NZ's Duffy.

While Kiwi consumers can't do much about the influence of global dairy prices which reflect supply and demand, he said the Commerce Commission could have provided shoppers with more protection from the supermarket duopoly when it had the chance this month.

The two chains Foodstuffs and Countdown should be facing much tougher recommendations in the competition watchdog's final report to the Government on the state of the supermarket industry than they are, Duffy said.

The commission has been widely criticised for a weak final report and recommendations after showing its teeth and seeming to favour significant change in its interim report to the Government last year.