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Although dairy prices are slipping, they may be the only food item that is. Guy Trafford reports that a flood of big price increases are about to hit the market after suppliers find they can't absorb them anymore

Rural News / opinion
Although dairy prices are slipping, they may be the only food item that is. Guy Trafford reports that a flood of big price increases are about to hit the market after suppliers find they can't absorb them anymore
inflating prices
Image sourced from Shutterstock.com

The see-saw that drives the Global Dairy Trade action has definitely continued being stuck in the mud and if anything has gone in a bit deeper at this latest sale. With the weighted average down -4.6% on the previous sale.

  • Butter index down 2.6%, average price US$4,851/MT
  • Ched index down 3.9%, average price US$4,769/MT
  • SMP index down 6.9%, average price US$3,250/MT
  • WMP index down 4.4%, average price US$3,421/MT

After hitting record highs earlier this year the price is now the lowest since January 2021. Given that consumer prices for many if not most foods are reaching record highs the downward trend is bucking what is happening locally.

Much of the reversal of the dairy prices appears to be due China still struggling to break out of its self-imposed covid shackles. Due to the current attitude being reinforced at China’s Communist Party Congress this week it appears that the reduced demand may continue for some time yet. Westpac has come out acknowledging that there are “now downside risks to our milk price forecast of $9.25/kg”. It’s too early yet for dairy farmers to lose sleep however if the trend continues beyond Christmas we can expect Fonterra to start chipping away at their forecasts.

The only bright light is the ongoing commentary that has world milk production down which should eventually lead to a price recovery.

Domestically we had the release of the inflation rate for this year’s 3rd quarter being at 2.2%. It appeared to surprise some economic commentators. They obviously haven’t been the ones doing the grocery shopping.

For most people they have been seeing prices going up on an almost weekly basis.

Most suppliers to supermarkets and other retailers have tried to contain price increases and pass them on as a last resort. Given the low rate of inflation prior to this year persisting for some time many have been out of practice of doing regular adjustments. Unfortunately, not so now. So, a lag in price increases which had appeared in some products is now in catch-up mode. A snippet from a notification from our egg supplier is likely to be reflected around the country.

“We’ve worked hard to maintain constant prices however we continue to experience several cost increases from our suppliers which are now beyond our control.

• The biggest input for our operation is feed for our hens. Feed costs from our supplier continues to increase another 10% increase in addition to the 32% increase experienced earlier this year. The cost of raw materials and proteins for feed continue to rise globally. We have been notified by our feed supplier that we can expect another review in the first quarter of 2023.

• Moulded fibre packaging increased 19%, due to the cost of raw materials, electricity, gas, and freight increasing.

From the 1 November 2022 we will be implementing a 23% increase per tray for all grade sizes and dozens cartons”.

The costs these folk have carried will also be being incurred by pig farmers. It will also be being felt overseas where much (most) of our pork comes from so bacon lovers cannot expect too much reprieve from imported goods. If the prices haven’t gone up dramatically yet it can only be a matter of time. Bacon and eggs may become a discretionary expense at this rate.

I was also talking to a grain rep who said despite the high prices being paid they have farmers nervous about sowing crops due to the high costs incurred from diesel and fertiliser among other things and not knowing yet what prices will be like at harvest. 2023 contracts for wheat and barley appear to be in the $555 -$565 and $535 -$540 range respectively although I have heard of figures around $700 plus being paid for grain recently.

Given the high costs to grow it is probably at this level where it needs to be to provide farmers with some security when sowing. It may be that grains will be in short supply come next harvest due to reduced area compounded by, if the Australian experience is repeated, lower yields due to reduced inputs (i.e. fertiliser).

 

Sorce: Ruralco. Grain report.

The uncertainty that grew out of the pandemic appears to have some distance to run yet and there appear to be more downsides than up at the moment.

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39 Comments

We can OCR our way out of this, right?

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7

Well we OCRed our way into it

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18

so I experienced a sense of shock when my 3rd party car insurance dropped 5%.

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0

All the no hopers are crashing stolen cars into jewellery stores and dairies these days instead of their own cars?

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1

Mine went down 50% but is that because I have never had a claim on it for as long as I can remember ? Maybe you get to 10 years without a claim and you then get a special rate.

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1

Check the fine print - maybe the price was for 1 month, not 12.

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0

Cheese is not getting any cheaper. This is a spring of .... abstinence.

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5

... get the kids to ram raid a neighbour's car into the New World ... nick the blocks of cheese ...

Gotta make more sense than tearing into Michael Hill Jewellers  ...

 .  . tasty ... hmmmmmm  ....

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8

Chima bemuses me. The central planning that apparently rules the country would lead to them buying to store when prices are low. You would think. But instead, they seem to act like market driven traders .

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Yes. But important to remember that dairy is not necessarily a staple for Chinese people. Many people can and do live without it. 

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4

China is actually highly capitalist. Although Chinese importers note what the Government is saying, they make their own decisions all aimed at maximising their own market-driven profits.
KeithW

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7

China is actually highly capitalist. Although Chinese importers note what the Government is saying, they make their own decisions all aimed at maximising their own market-driven profits.

Very true. 

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Read somewhere that agricultural inputs were leading the charge with regards to inflation so it’s no surprise it needs to wash through - the surprise will be in how supply (constrained due to lowering inputs) meet demands (also constrained due to high cost to purchase) - recipe for an all fire economic train wreck which could be of a scale not seen since the Great Depression. If buyers can’t buy and sellers can’t sell at a profit then an enormous amount of value needs to be lost out of the system in order to let the value re-adjust to where the new (poorer) economy can regain balance.

freaky 😳😳 

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12

For most NZ agricultural products, the demand comes from overseas and is predominantly expressed in USD.  So you have to factor in the exchange rate.
KeithW

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2

Methinks the phenomenon might yet be global ….

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0

I didn't realise until last week that most of our bacon comes from overseas. I'll be sticking to Freedom Farms products which are NZ made but it comes at a 50% premium.

Beef prices still seem to be okay and that's all the food you need really.

 

 

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5

Regulation aimed at making pig farming more humane is just around the corner too.

So we just continue to import it from (western) countries with less humane practices.

Fair dinkum.

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14

I thought most of our imported bacon, ham etc is from China.

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Canada & from Belgium ...

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The Beehive bacon I looked at today said it could be sourced from: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Netherlands, Poland, UK, Spain, Sweden, USA. Anywhere but NZ?

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2

Lovely - aren’t we glad the farmers here are at least on a level playing field in terms of regulation so they can supply us with good safe food produced under the highest standards without needing to worry about being undercut by the rest of the world?  Err …🤔

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7

The bacon can be labelled from the EU, but the original Pig was raised in China. The carcass shipped to europe where it is then salted and turned into sides of Bacon, which are then exported to NZ where it is sliced and packaged.

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1

Low carbon foot print Bacon ! 

Unbelievable 

 

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2

So much food is made overseas these days, especially the home brand stuff. Often made in countries where their own citizens don’t trust their food. One day it’s bound to go horribly wrong. 

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2

It's only labelled the way it is "made in NZ from local and imported ingredients" so they could avoid saying it's imported pork. The go-to excuse was that they couldn't accurately say what and how much of each ingredient was from where. Sounds unbelievable - or maybe they're shockingly bad at process manufacturing.

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0

To be fair, it would be expensive to relabel a product line because one small ingredient had to be imported short term. Perhaps they could set a minimum %, say 80% NZ made to be labelled in such a way.

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I believe IMO this is a result of the banning of Sow crates years back, many farmers pivoted from pork due to the large increase in costs of production, and then the importation from Spain at the time increased, now from wherever. We demand better animal practices, then simply buy from countries that don't have the same legislation so that we can keep the product at a price consumers will pay. 

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2

NZ like much of the west is about to raise interest rates & taxes to lead us into prosperity but I don't recall a historical success so perhaps Einstein was right - doing the same think and expecting a different result is insanity.

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1

... that's why I keep banging on about avoiding  Labour & the Gnats  ... same frigging result either way ... shake it up / burn down the house  ... vote ACT &/or TOP   .... stop the current insanity , start a brand new different  one  ...

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5

Your thinking is not unique, the majority of people I talk to are thinking the exact same. Great to hear NZ is wise enough to see a better future outside the historical trend of two major parties

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0

I think it’s to save us from inflation, and it has worked before. Take a look what happens to countries that don’t battle inflation. 

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1

Re-Set. We've done the R. Next is the e.

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PS: We do s....t bacon already. 

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" Fresh Pork " ... Kiwi owned , growned  , slortered & cured : de-freaking-licious 🐷

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4

Domestic inflation is pretty bad but Reserve Banks show little inclination of substantially raising rates. Building an everything bubble is easier than deflating an everything bubble.

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6

Assuming raising the OCR will significantly reduce inflation. The current inflation is caused by increased costs (internal an external), rather than excessive demand. 

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1

So in May I put 10 tonne of fert on the easy country. $500/tonne give or take. In September a similar amount, $800/tonne. If you goobers out there think there is any room to pay for methane or co2 emissions your dreamin mate.

So next up is the real deal, the main course so to speak. I am dabbling with heading back to dicalcic, cheap...bit of lime in there, adding a dash of sulphur and bugger the potassium. However most other farmers I know are just putting lime on. So just watch production tank. Mine will with what I am doing. But only lime? 

It might take another year depending on your soil types and fert history. But it will happen. Food inflation isnt just here, its going to get a lot worse.

 

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10

Forgive me for being a little skeptical but I think that at least some inflation-blamed cost increases are simply a self-fulfilling convenience initiated because of the times we are in rather than the real need for a business to stay solvent.  They may be a case of "everyone is raising their prices so why shouldn't we?".  For example, with respect to the egg supplier quote Guy refers to, I honestly fail to see that actual unit price increases in overheads such as electricity, labour, transport, etc. have occurred to the level of the 23% quoted.  Anyway, if businesses are really hurting that much, then why does Orr actually need to increase the OCR to dampen spending.

The RBNZ is now in a cycle of increasing the OCR each and every review, but to continue to do so can surely only add to inflation, not restrict it. Just stop doing it Adrian.  Afterall, the housing market is contracting at last so why increase the OCR for this particular factor and surely our dollar has now reached a point where exporters should be a whole lot more competitive irrespective of cost pressures. Further drops in the value of the NZD can now only add to imports driven inflation. 

The RBNZ should see that the old economic rules just don't apply now.  Increasing the OCR used to see a commensurate rise in the value of the NZD but that certainly hasn't happened this time round. 

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Good point, interest and rent are both business expenses that need to be passed on.

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