Media reports suggest a 1kg block of tasty cheese has topped $20 ... again
OPINION
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Here we go again. Cheese prices are on the rise and they are going to rise further.
We’re already seeing angry headlines about a 1kg block of tasty hitting $20 and concerns that inflation is making an unwelcome return.
Well, as consumers, we’ll just need to suck it up because the soaring cost of cheese is entirely symptomatic of the rise in global dairy prices.
And that spectacular rise over the past six months looks set to save our economy, dragging it out of one of the darkest recessions in decades.
Price rises for cheese should never be a surprise to anyone in this country.
They closely follow the Global Dairy Trade auction that we report on every two weeks.
When global prices rise, consumer prices follow with a lag of several weeks as they work through the supply chain.
It’s been a remarkable turnaround for dairy prices in the past nine months or so.
Some keen readers might recall I wrote about this topic for Inside Economics last June.
I was marvelling that 1kg blocks of cheese were the cheapest they’d been in five years.
The price for a 1kg block of mild cheese was $10.02 per kg in May 2024, down from $14.56 in January 2023, according to Stats NZ.
Back in 2023 tasty cheese prices were up as high as $25/kg.
Why tasty costs more
It’s worth noting here that the Consumers Price Index is referring to mild cheddar cheese and the outrageous prices we see in headlines are almost always for tasty which costs more by default.
One of the simple rules for cheese pricing is that the higher the fat content the higher the price.
The most basic measure of dairy prices is milkfat solids. At the high-value end, other complex proteins get separated and sold for specialist products.
But at the high volume end, it is all about fat solids and water.
So the softer the cheese the cheaper it should be - because you’re basically buying a lot more water.
There are other factors like time spent maturing and processing, but you should generally expect cream cheese and feta to be cheaper than hard cheeses like Parmesan.
We see that reflected in the extra dollars we pay for tasty compared to mild cheddar or Colby.
On the plus side, the hard cheeses have more flavour so we shouldn’t need to use as much. And as they’re higher fat we really ought to be eating less.
Rapid rise
Soon after that May low in retail cheese prices, the global export price started to move.
In mid-July the price for a metric tonne of cheddar cheese was US$3980. It most recently peaked (in early February) at more than US$5000 per tonne.
That’s roughly a 25% increase so it’s not surprising that we should now be paying an extra two or three dollars for a block of cheese - or $5 for tasty.
In fact, by November the run of global dairy commodity prices had become remarkable.
At the time I wrote a column warning that we’d better brace ourselves for higher cheese prices.
“We’ll almost certainly be paying a few dollars more for our cheese next year, but we shouldn’t grumble. It looks like New Zealand is about to get very lucky as a combination of global market conditions and local weather conditions line up to deliver the economy a much-needed, dairy-fuelled boost.
Global dairy prices have been rising, rain has been falling and the grass has been growing."
And so it has played out. New Zealand is getting very lucky again.
Let’s put the higher price supermarket price in some macroeconomic context.
That 25% fluctuation in cheese prices is costing you a few dollars more a week.
But relative to the weekly fluctuation in petrol prices it’s not huge.
You also have a choice around how much cheese you eat.
Meanwhile, the Treasury says dairy exports were valued at $23.7 billion in the year to March 2024, representing 24% of total export values.
Analysts say the strong global dairy prices (and production season) will bring an additional $4b into the economy this year.
That’s as more than the entire kiwifruit sector or the film industry. It’s two wine sectors.
We export so much dairy that when global prices rise it is a wildly lopsided net benefit for New Zealand.
Yes, the extra money flows primarily to farmers but they will either pay down debt with it or spend it.
Debt repayments will reduce the amount of interest flowing out of the country to Australian banks. On-farm spending will still flow through the rural economy.
They’ll also pay taxes.
From a macroeconomic point of view, it doesn’t really matter much where the money goes.
Either way, it adds to the country’s total positive side of New Zealand’s balance of payments equation and will help reduce our current account deficit.
Why do we have to pay high prices for cheese when we produce so much here?
I believe there is a cultural component to Kiwi complaints about high cheese prices.
The 1kg block of cheese has been a staple grocery item for generations.
I’ve noted before that different foods spark stronger consumer reactions in countries where they are more culturally significant.
In many parts of Asia rice prices are a flash point. In China, pork prices have been a source of public discontent. In India, onions are hugely significant.
When a product is abundant locally we have expectations about being able to afford it.
But the bottom line is that the wholesale price for dairy products inside New Zealand is the same price as for international customers outside New Zealand.
If Fonterra and the other smaller dairy producers can get a high price why should they subsidise New Zealander’s cheese consumption with cheaper prices here?
If anyone was going to subsidise us, surely it would be the Government.
But then why cheese, why not some other food? Or power?
We mostly stopped doing that sort of thing in the 1980s as the Government ran out of money.
Also, we were more or less subsidising the farmers more than we were consumers. It didn’t help the agriculture sector which became less efficient.
After a painful period of re-adjustment, our primary sector has seen big productivity gains across the past four decades and is one of the most efficient in the world.
What about the supermarket duopoly?
Of course, there’s some strong feeling at the moment about overall pricing at New Zealand supermarkets.
The issue of whether we are paying too much due to a lack of competition in the retail sector is a highly live one.
I think we can look through here as long as the price rises are relatively in line with global commodity price movements.
I’m pleased to see that our Commerce Commission is reviewing supermarket competitions and pricing in some depth.
For the record, I’ve been doing the weekly family shop at the local Pak’nSave for about 20 years.
My micro-economic solution to the cheese prices will be to buy less tasty. It seems like a small sacrifice for the kind of economic fuel injection the current dairy boom will deliver.
Q: Liam,
The US is trillions in debt, but still the world panders to the US$, using it as the financial benchmark and the international currency - my question is – why do financial markets continue to support the US$ when it is in chaos with no sign of attempting recovery, or ability to ever recover from its level of debt?
Regards
Rick Hoskin
A:
Thanks, Rick. Good question. I think there are a few reasons the first of which is simply that it has been the default since 1944 and change would be very complicated and hard to manage.
For starters, there isn’t an obvious alternative.
The Chinese yuan has state controls on its flow and value.
The euro might have potential but is subject to high levels of political instability given it is the currency for 20 European nations.
Ultimately, the US is still the largest economy in the world by quite a long way. Its GDP was around $30 trillion last year, compared to $19t for China. In fact, it has a larger GDP than the entire European Union (at around $20t).
So there’s that. Then there is military might. The bottom line is that the value of currency is basically a massive shared agreement.
It has no intrinsic value. In the end, a nation’s ability to guarantee a currency’s value relies on public faith in its stability and the ability to maintain that stability - with force if required.
The US remains the world’s most powerful military force and is best placed to guarantee the value of its currency.
The lack of state backing is one of the reasons some people like cryptocurrencies like Bitcoin but it’s also one of the reasons why it’s hard to see it replacing the US dollar or any other nation-state currency anytime soon.
A US president could regulate cryptocurrency out of existence with the stroke of a pen. Okay, the current president likes it (for now) but what could Bitcoin owners do if he banned all cryptocurrency trading in the US.
There are many things that we like to think make the world a civilised place but in the end, a state monopoly on the use of violence sits at the base of it all.
Debt defence
Finally and somewhat ironically, all that US debt actually makes it harder for other countries to give up on their dollar.
The fact that China holds trillions of US dollar bonds is a disincentive for wanting the greenback’s value to collapse.
The large amount of US bonds that have been issued also means it has the deepest, most liquid markets which adds to its position as the number one global currency for trade.
Last week’s Reserve Bank Monetary Policy Statement didn’t disappoint.
We got the long-promised 50 basis point cut to the Official Cash Rate and new forecasts pointing to at least another 50 to come before the end of the year.
The cut was passed through immediately to floating interest rates and in the past week, we’ve also seen some decent moves on fixed interest rates.
In particular, we’ve seen all the major banks drop their special rate for two years fixed to 4.99%.
It’s an enticing rate. But as has been noted by Business Herald Wellington editor Jenée Tibshraeny Kiwis are currently opting for floating and shorter-term fixed rates in record numbers.
It remains to see whether the banks will succeed in pulling more Kiwis back to two-year fixed terms but at least one analyst believes we should be looking to lock in sooner rather than later.
“The reality is the forward market has already priced the easings that most people are expecting [in], so it’s not clear that even if they cut another 50 basis points, that mortgage rates will fall very much,” JB Drax Honore chief Asia Pacific strategist Sean Keane told Markets with Madison.
Watch the full episode below:
Meanwhile, the Reserve Bank has used the spotlight in the last week to raise issues it has with the quality and frequency of key economic data coming out of Stats NZ.
RBNZ Governor Adrian Orr told Parliament’s Finance and Expenditure Select Committee that he would like to see monthly GDP updates with a breakdown of spending, production and income.
He also stated that he would like to see monthly reporting of Consumers Price Index inflation (we currently only see it every three months) and more regular “rebasing” of the index to ensure it accurately reflects the spending of New Zealanders.
It’s a topic I’ve raised in this column before.
I’ve never seen it as an issue of poor performance. My experience with Stats NZ has always been positive and its staff is helpful with requests.
But I believe funding them to deliver better stats at better timing would be immensely valuable.
If there isn’t more money then new Minister Shane Reti might consider taking a look at what could be done in terms of prioritising focus on the economic statistics which most align with the Government’s policy of growth and wealth creation.
Public confidence must be maintained in Stats NZ. Its work forms the very basis for the arguments we have about the economy.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
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