What’s the story with the price of dairy?
As Kiwis, we’re used to punching above our weight on the world stage. From sport, to film, we produce some of the best, and dairy is no different.
While our population may be small, we proudly produce around 30% of the world’s dairy exports. Across the globe, more and more people want and need the kind of nourishment that dairy provides and with a reputation for quality, demand for New Zealand sourced dairy products is growing.
For most New Zealanders, golden yellow butter is the norm. That’s because cows in New Zealand mainly eat grass, which is what gives our butter its colour and the taste we know and love. Travel to other parts of the world, like North America, where cows often eat a mixed diet including grain, and you’ll find butter is often pale yellow or white.
Without the domestic market to consume all our delicious dairy, we export it. Around 95% of the milk Fonterra farmers produce is shipped to more than 100 overseas markets, where it’s in hot demand by customers from China to the United States. That’s good news for New Zealand farmers and our economy.
Like coffee or cocoa, dairy is traded globally as a commodity and, depending on global supply and demand, prices can go up and down. Because we export most of our dairy, the global market sets the price our customers pay. In bigger countries, with more people to consume dairy, less is exported. India, for example, is the largest producer of dairy but almost all of it is consumed locally. That means the domestic market determines the price of products, rather than the global.
For most New Zealanders, golden yellow butter is the norm. That's because cows in New Zealand mainly eat grass, which is what gives our butter its colour and the taste we know and love.
In New Zealand, our customers buy both finished goods (think butter or cheddar) and wholesale milk from us. They use that wholesale milk to make their own products, which they sell to supermarkets or local dairies, for example.
When global demand for dairy increases, the global price increases, which means the price our customers pay can rise too. It’s up to them to then decide how much they want to pass on to their customers when they sell their own products. Like any business, they also need to factor in other rising costs, such as labour, packaging, energy, manufacturing, storage and distribution, when setting their prices.
Supermarkets and other retailers who buy these products then set their own retail price, which is the amount consumers pay at the checkout.
In addition to influencing the price consumers pay, the global market also impacts how much farmers are paid for their milk. This is known as the Farmgate Milk Price and is measured in dollars per kilogram of milk solids. It’s called “farmgate” because it’s the value of the milk at the farm gate, before it’s processed into products like butter, cheese or milk powder.
Each season, Fonterra provides forecast updates as global conditions change and then confirms a final Farmgate Milk Price once the season ends. This payment is separate from dividends farmers may receive as shareholders in the Co-operative. Learn more about how the Farmgate Milk Price is calculated here.