Cheesed-off

The lush green paddocks of the Waikato plains, with their milling Jersey-Friesian cows, turned an inky black. Dark clouds lowered. Lightening flickered, the heavens opened. Rain falling fast in thick sheets. Visibility, crawling at 5km/hr, wind-screen wipers going flat tack, was a couple of metres of tarseal ahead amid an enveloping dim.

The obfuscation on the road to Waharoa pretty much mirrored how this story was going. The idea seemed simple enough - investigating the outrageous price of cheese by following the food chain, from farmer to cheese maker to cheese packer to supermarket shelf. It wasn't going well. The explanation so far for cheese's high price - a 1kg block of mild cheddar has risen 65.8 per cent since April last year according to our Food Price Index - was world prices. How dull. How convenient.

Cheese is a commodity product. Most of the cheese we make is exported. World cheese prices have increased dramatically in the last two years. So it's perfectly natural that our prices should go up too. Global supply and demand. Get used to it. End of story.

But something doesn't make sense. Yes, the farmers are getting paid more for their milk at the farm gate because of high world prices. Yes, that must flow on to increased prices for consumers. But the increases on the supermarket shelf for cheese seem astronomical in comparison to the farmers' increased payout for milk solids.

Last week at the Devonport New World supermarket, 1kg of Mainland Tasty cost $16.15 and Mainland Mild cheddar, $13.95. Budget Tasty was $12.55 and Budget Mild $11.15. It's similar astonishing reading at Foodtown Grey Lynn. The New Zealand made 1kg Signature Range Tasty cost $13.79. Strangely, the HomeBrand Tasty which is made in Australia was $10.99. One kilogram Anchor Tasty blocks seem to have disappeared from the shelves - replaced by 900gm blocks at $15.29. A year ago these 1kg blocks were around $6 or $7.

Money for cheese
How does a dairy farmer getting $7.30/kg of milk solids, instead of $4.46/kg a year ago, equate to a doubling in the price of cheese? Waharoa is in the heart of Waikato dairy country and home to a good number of New Zealand's 5.3 million dairy cattle. It's also home to two cheese factories that operate outside the Fonterra virtual monopoly which is responsible for about 96 per cent of our dairy production - some 14.34 billion litres of milk and 285,000 tonnes of cheese a year. Perhaps these factories' independence from the Fonterra giant might shed light on the intricacies of cheese economics.

First stop at the Open Country Cheese Company begins with a familiar story. "Cheese has effectively doubled in value over the last two years," says chief executive Alan Walters. "It was around US$2500 a tonne. Now it's around US$5000 a tonne." Walters is talking about the world market for cheese which is where almost all of Open Country's 20,000 tonnes of mainly cheddar, produced in 20kg blocks, goes - to the Middle East, Africa, Asia, Australia, Korea, the West Indies and Britain.

But Walters points out that if you take into account the value of the New Zealand dollar, the increase isn't quite so dramatic. In New Zealand dollars, cheddar has gone from $4020 a tonne two years ago to $6920 this year. A year ago the cheese price was $4160 which means a difference of $2760 a tonne on today's prices. In other words, both Fonterra and Open Country are receiving $2.76/kg more for their cheese than they did a year ago. Good for them.

Who gets what
But if that's the increase due to world prices, why does the consumer have to pay $6 or $7 a kilogram extra rather than $2.76? It doesn't sound right.

Wyatt Creech at the Kaimai Cheese Company, a specialist cheese maker next door to Open Country agrees. The former Deputy Prime Minister, now chair of Kaimai's board says there's no question the world price of dairy products, and therefore the price of milk, is very high. And that will be reflected in the price of cheese. But he believes the lack of competition here means prices are higher than they should be. "On a relative scale, milk products should be cheaper in New Zealand than they are in just about any other country. We are a very efficient dairy producing country."

Creech says it's misleading to assert that higher international prices are the sole driver of the price increases being imposed on consumers. He says the extent of the increases the consumer has seen go far beyond increases in international dairy prices.

Take milk, the key raw ingredient for cheese. The milk solids (fat and protein) the farmer gets paid $7.30/kg for equates to 63c/litre of milk. A year ago the farmer was getting just 38c/litre - so today's payout to farmers represents an increase of 25c/litre. So why are consumers are paying around $2.20 per litre? Taking out 63c for the farmer leaves an additional $1.57 worth of cost increase between the farmer and the supermarket shelf.

A year ago a litre of milk was around $1.40. Add 25c for the extra paid to the farmers and you'd think it should be selling for $1.65 rather than $2.20. Why are consumers paying an extra 55c/litre and, more importantly, who along the food chain is getting it?

Creech can make the same argument with cheese. The farmers' payout for milk solids equates to $4.31 for a 1kg block of cheese compared to $2.62 a year ago - a difference of $1.69. Yet the consumer is paying $6-7 more for a 1kg block. Add in the increase for the higher priced milk and there is still $5.31 of cost increase not accounted for.

As Creech points out it's impossible to know who is getting the surplus money because no one will tell you what their margins are. Which is why he's made a complaint to the Commerce Commission - the only organisation with the power to force companies to open their books to determine if there is excessive profiteering.

Cutting the block
So who is making money in this unprecedented upswing in world prices - this golden age for cheese? Obviously the farmers. But with extra increases not accounted for by world prices sloshing around in the cheese food chain, somebody else must also be doing well.

Not us, says Open Country's Walters. "We're in a competitive environment competing at the farm gate. We don't make any more money out of it," he says, pointing out he has to pay dairy farmers for raw milk at rates that are competitive with Fonterra, Westland, Tatua and other dairy companies.

Michael Laird, managing director of the Grate Kiwi Cheese company isn't making any extra either. "We're making a lot less. Our margins have come back a lot. Freight costs have increased, so has plastic because of oil prices. So packaging costs have gone up. As have wage costs." Laird, whose company provides its own brand of grated cheese to the food service market and packs Anchor cheese products under contract to Goodman Fielder, says the market place is not responding well to the high increases and sales have dropped back. "You have to cut back your prices, cut back your margins, to get the customer to buy more."

Laird says a price increase of this magnitude coupled with increases in freight, packaging, electricity and wages is not something he's seen before. "Last year for me to buy a 20kg block of cheese the price went from $4.30 a kilogram to $6.95 in space of six months - that is an 80 per cent increase." Inevitably, he had to put his prices up. The grated cheese packs for the food service industry that he was selling through Gilmour's for $35-$38 a bag pre-Christmas now sell for around $66. Not surprisingly the increase has a flow-on effect to the consumer. Pizza prices have increased and some say there's now less cheese being put on pizzas.

"I've stood in supermarkets to watch people's habits buying cheese. I've watched a person go to a 1kg block, look at the price and put it back on shelf. Then they pick a 500g block, look at the price and put it back." Eventually, he says, shoppers often opt for a pack of processed cheese. "Plastic cheese," says Laird. He's referring to the process that occurs with the bulk of the natural New Zealand cheese that goes offshore - melted down, mixed with emulsifiers, salts, stabilisers, added flavour and often fortified with starch, vegetable oils or milk powder. In some cases the end product might have as little as 20 per cent natural cheese content. "Consumers are going for a product that is no where near as good for them as natural cheese. What's driving them there is price."

Don't blame us
Federated Farmers has also been driven by the high price of food to commission independent research to show farmers aren't necessarily creaming it as a result of world prices. With regard to milk, the research shows the farmers' share of the retail price is 35 per cent, up 10 per cent on 2004 figures. For cheese, however, the farmers' share is shown as just 5 per cent.

As it turns out, the percentage is incorrect.

A Fonterra spokesperson says the company wouldn't normally release such figures because it regards them as commercially sensitive. But in this instance, it says the farmers' percentage share of cheese prices is in "the high thirties'. A spokesperson for Federated Farmers says the discrepancy comes down to how the fat content of cheese is calculated. It now acknowledges the farmers' share of cheese prices is in the 15-35 per cent range. In other words, when it comes to dairy products, farmers are getting about a third of the retail price.

Despite its methodological problems, the Federated Farmers research highlights the fact that world prices aren't the only reason for high prices. But because the food chain from farmer to supermarket shelf is far from transparent, quite what else is contributing the price hike for cheese remains unclear.

It's possible high world prices have combined with other price rises in freight, wages, electricity and packaging to create a kind of perfect storm of price increases that somehow have focused on cheese. But it's the magnitude of the cheese increase (65.8 per cent) that remains puzzling. Why has it gone up so much compared to other products like milk which has increased just 22.9 per cent?

An alternative explanation to the perfect price storm theory is that a number of parties in the cheese food chain are taking increased margins. Besides the farmers, there are two prime suspects - Fonterra and the supermarkets. The Weekend Herald asked both if they could shed some light on the price increases.

A spokesperson said Fonterra brands have reduced their margins in the last 12 months, but wouldn't tell us by how much or what the margins were. Fonterra also reiterated that the value of milk internationally is the key determinant of wholesale and retail prices here. And that there were a number of other contributors including: packaging and processing costs; distribution and sales costs; overheads; processors margins; retail margins; and GST.

The spokesperson also said: "When the global price is strong for dairy commodities, as now, its good news for farmers and the New Zealand economy. Because, not only does it contribute to a higher payout but also higher export earnings for New Zealand. Unfortunately, the flip side is that it drives up the dairy prices for all of us here in New Zealand. There's plenty of competition here in New Zealand, it pays to shop around."

Our cheese, over there
The Weekend Herald did a little shopping around in Australia. At a Woolworths supermarket we found 1kg Homebrand cheddar for $A5.99, Bega Tasty, on special at $A8.98 (it's usually $A11.05) and Woolworths brand Colby for $A9.51.

But the really surprising find was a New Zealand Mainland Tasty $A10.78. On Friday's exchange rate that's $NZ13.28. Which is cheaper than the $14.13 (GST removed) Mainland Tasty we found in Devonport New World. They really are selling our cheese cheaper over there. "We don't sell our cheese cheaper over there," said the Fonterra spokesperson who explained there could be a number of reasons for the discrepancy such as specials and the fact that cheese gets cheaper the closer it gets to its expiry date.

We also asked our two supermarket chain owners about whether they were taking increased margins. Foodstuffs chose not to respond. A Progressive Enterprises spokesperson said there were many factors which influence retail food prices, such as global commodity prices, product availability, transportation costs, storage and operating overheads which are subject to fluctuation.

"In the past 12 months, we have seen these factors result in price rises on some products and we continue to absorb these as much as possible. We recognise that these changes have put pressure on many New Zealanders so have ramped up our specials programme on key items such as bread and cheese. We have also utilised our Homebrand range to maintain a very competitive price point on many key basics (eg Homebrand 1kg Edam/Colby cheese $9.99)."

There is then no clearcut answer as to why, in the most efficient dairy producing country in the world, cheese prices are so high. But what seems likely is that while prices stay at these levels, consumers will visit supermarket cheese shelves less and less.