Why cheese and milk prices remain high... and will be slow to come down

Persistently high cheese prices are helping to keep NZ inflation high. Photo / 123RF

Cheese prices remain high despite a sharp fall in Global Dairy Trade auction prices and there are signs they may take some time to come down.

Stats NZ singled cheese prices out as being one of the culprits responsible for a 6 per cent increase in the Consumers Price Index for the June year.

Vegetable prices increased 23.3 per cent in the period, while ready-to-eat food and milk, cheese, and eggs increased by 9.8 per cent and 13.8 per cent respectively, Stats NZ said.

Among the dairy group, cheddar appeared to be the main offender, even though retail prices look to be off their peak.

Stats NZ data showed the average price for 1kg of mild cheddar from the supermarket came to $13.78 in June, up from $11.88 a year ago, but down from their $14.56 high in January this year.

Cheese prices have generally remained elevated despite a sharp fall in Global Dairy Trade auction prices, particularly over the last three bi-monthly auctions.

At this morning’s GDT event, cheddar traded at US$3955 ($6311) a tonne, down 10.1 per cent from the last auction, and a far cry from its September US$5147/tonne peak.

Westpac senior agri economist Nathan Penny said that with a 2 litre bottle of milk, there is a general relationship with the price that farmers are paid, but the lag time is quite long - up to a year.

Fonterra’s farmgate price hit a record high of $9.30 per kg in 2021-22 but has steadily fallen ever since.

Against that background, Penny expects the retail price of milk to decline gradually from here on in.

“With the other prices - butter, and cheese, there is a similar lag.

“Cheese prices have stayed higher for longer, relative to the benchmark milk price, so that’s not a surprise,” he said.

He said cheese prices could continue to moderate over the course of this year.

“Retail prices are much slower-moving, so there will be a gradual decline, but we do expect, for the remainder of this year, them to lead lower rather than higher.”

Lag times

The reason for the big lag times between wholesale auction prices is the duration of contracts between the manufacturers and retailers, he said.

“The raw material component of a retail product is not that big either.

“There are all the other components that go into it like transport, wages, marketing and branding, which kind of waters down the impact of the raw milk price to a degree,” he said.

ANZ, after a weaker GDT, revised down its farmgate milk price forecast for the 2023-24 season by 50c to $7.75/kg milksolids.

The bank’s forecast for 2022-23 remains at $8.20/kg milksolids.

ANZ said global demand for dairy products has been impacted by deteriorating economic conditions affecting consumer demand, particularly in China.

“The relatively weak NZ dollar remains supportive of the farmgate milk price but is not sufficient to offset the impact of lower returns for dairy commodities,” ANZ agriculture economist Susan Kilsby said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.