NZ dairy giant Fonterra has announced it will freeze the price of wholesale domestic milk prices for the rest of 2011.
The move comes as soaring world commodity prices push up the price of domestic milk, which the issue this week attracting pressure from TV3's Campbell Live program.
A spokesman for Fonterra told interest.co.nz the freeze would affect the co-op's final payout to farmers this year.
"We won’t know to what extent until the year ends as it will depend on how much milk we sell," the spokesman said.
Fonterra exported around 95% of its milk, the spokesman said.
Meanwhile, Countdown, Woolworths and Foodtown supermarkets said they would freeze the retail price of milk for the rest of the year, following the Fonterra move, Stuff reports.
See the release below from Fonterra:
Fonterra today announced that its Fonterra Brands New Zealand (FBNZ) business will freeze wholesale domestic milk prices for the rest of 2011.
CEO Andrew Ferrier said that international milk prices had risen steadily over recent months. FBNZ had already absorbed around $10 million of increased costs and with this commitment any further increases during the year will also be absorbed.
“We have seen world dairy prices go up by more than 26 per cent in the last six globalDairyTrade events. While these increases have had a big impact on raw material costs for FBNZ, we have only passed on an average increase of 1.4 per cent to our retail customers who ultimately set the price paid by New Zealanders.
“Looking forward global food prices are expected to remain strong. This is not just an issue for dairy or just an issue for New Zealand. There has been a fundamental change in supply and demand for food internationally which has pushed prices to their current levels.
“While these prices are good for food exports and the New Zealand economy, New Zealanders are feeling the effects of this in their shopping trolley.
”We recognise milk is an important part of the diet in New Zealand and we want to ensure that future generations of New Zealanders grow up enjoying it every day. It would be great to see retailers getting in behind this commitment for the benefit of New Zealand consumers.
Fonterra Brands New Zealand Managing Director Peter McClure said: “Global price increases will continue to impact the price that dairy manufacturers like ourselves pay, however, we want milk to remain an every day part of the Kiwi diet so we’ve made a commitment to absorb any extra costs for the rest of the year. “
Mr McClure said that although prices were high, drinking milk on a daily basis had real nutritional benefits and milk was still good value for money when it comes to getting your daily nutrition intake.
“Just 50 cents will buy you a breakfast of two Weet-Bix and milk.
“Through our KickStart Breakfast programme, partnering with Sanitarium, we are seeing the real benefits a nutritious breakfast provides school children. Since the programme started two years ago we have provided more than 1.5 million free breakfasts which is not only giving children a nutritious start to the day, but is also having a positive impact on their performance at school.
“A glass of milk will give a child around a third of their daily protein and calcium intake and up to two thirds of some vitamin requirements which is more nutrition for a much lower price than most fruit, vegetables and meat,” he said.
(Updates with link to Stuff report, Fonterra comment on payout)
78 Comments
Well both comments are accurate....so why is producing something other countries need a bad economic strategy?
I tend to agree with NZIER, ive said as much before we are in a global food market and NZers earn less than other developed nations.....the same of course applies to crude oil...so if we have high crude oil prices that makes our balance of payments negative without similar high food prices....
In terms of ride it out, the suggestion is with that taht prices will drop? cant see it, sure it will have its ups and downs but there are a lot off ppl wanting food.....the trend I expect to be upwards.
In effect high food prices will effect house prices....higher food prices means less of a mortgage....but oil/petrol will have a similar effect...
regards
OK sorry I'm not saying that producing food is bad economy strategy but rather that it seems to be our only economic strategy http://www.interest.co.nz/news/cant-stop-kiwis-skipping-pond-instead-we-need-capitalise-our-strengths-small-nimble-primary-sector-p and that's not good. As the NZIER study shows increasing food prices have negative consequences for other parts of the economy by reducing discretionary spending. Furthermore rising commodity prices result in a stronger NZD meaning that non-commodity exporters take a hit and we are seeing a de-diversification of our export sector. Ask yourself why we are moving back into recession even though commodity prices are booming.
If us consumer is spending more on food then other parts of the economy receive less.....but NET it balances.....hmmm....sort of a fair point....cant clearly see what they mean....unless, some areas will see inflation, which is say food now if that means no more staff to serve that food, but other sectors suffer and let staff go then yes....I mean its still the same amount of food, still takes the same teller, same % of a truck driver same amount of diesel to transport... but then consumer then has less to spend in say DSE or Warehouse do they let staff go....and boy does DSE look empty these days.....
regards
I think you are slightly missing the point Steven. Domestic consumption of food products dwarfs that which we export. The volume of export payments into the county from dairy/beef/grain/lamb etc makes what apk n save n co charge NZers look tiny (can quantify numbers if required).
My point is, more money coming into NZ, has to go somewhere. Farmers dont stuff it in the matress. Either it is spent on domestic products, or used to repay debt, increasing future ability to spend on domestic product. Hogher food prices does benefit the economy.
On a purely selfish note, farmers par a heck of a lot of tax, GST etc when food prices are high. Tax which is used to cover working for families and other social welfare schemes. These schemes are what puts food on a lot of plates if NZ poorer families. Reduce the tax take from farming through lower prices - less tax paid - less $$ available to put milk on the table anyway.
Im not sure we are disagreeing here...........the comment was what happens as food prices rise....if that rise is due to input costs say fuel, then the farmer could well not be making anymore money....but the consumer only has $x so descretionary spending is reduced, that means businesses in those sectors have to close and that means more un-employed.....now if thats coffee shops and cosmetic stores, Im not going to be concerned...too much of the developed countries economy is the so called "service" industry, thats just churn and a lot of it is imports......it doesnt make the country rich it makes other countries rich....it allows the Govn multiple stabs at taxing every point though.....which of course means that a small contraction would seem to have a huge neg impact on tax take, which seems to be the case.
In terms of consumption, we also need to earn foreign exchange to pay for the imports like fuel.....so yes our balance of payments has to balance......so we need exporters...
Hopefully farmers are repaying debt as a priority.....not sure tractors etc are NZ made...
Im not in any shape or form saying good prices are bad......in fact I dont agree with the "research", quite a bit of it strikes me as opinion and right wing opinion ie faulty ideaology (the left are as bad btw). For instance they say high food prices in other countries is bad as the economies wont recover/expand as fast....expand into buying consumer goods sounds like their idea of good....for NZ however we take as food exporters more of the money from other countries and say china less on toys.....I dont see that as bad....for NZ.
So from what I can see NZ has 2 growth markets, that for renewable commodities that with a growing world population will get better for you as a farmer offssetting rising fuel prices and NZ and value added goods like say NZ made wool jumpers which benefit nz jobs....both can do well as they are different markets...
regards
My point is, more money coming into NZ, has to go somewhere. Farmers dont stuff it in the matress. Either it is spent on domestic products, or used to repay debt, increasing future ability to spend on domestic product. Hogher food prices does benefit the economy.
That doesn't seem to be the case since even though we have near-record commodity prices we are now slipping back into recession. As others have stated on this blog producing food consumes a lot of oil and other non-renewable resources that are now showing sharp price increases. Thus profitability of our primary sector does not seem to be high enough to have flow on effects strong enough to provide a motor for our economy while the housing sector stagnates. Also not sure that farmers go on a spending spree with any windfalls. If they were astute they would use this to build up reserves for when prices dip again since we know every boom is followed by a bust.
On a purely selfish note, farmers par (pay?) a heck of a lot of tax,
Interesting do you have any data on that? Others here have stated that many farmers pay hardly any tax and evidently even Fonterra pays less than $500,000
12.5 liters of milk per milk fat solid. Do the maths. Remember that there is 25-30 % less butter fat in our milk than what comes out of the cow.
The answer is to deregulate the industry so that farmers can sell their milk direct to the customer, simple but never going to happen.
Boatman, could you explain how Fonterras Monoploy Pricing strategy works?
Also the government regulated Fonterra as a requirement of formation to provide 200 million(?) litres of milk at a price below cost to Goodman Fielder, to ensure domestic milk markets weren't exploited by a NZ co-op. Now it seems multinational corporates are exploiting it instead.
Regulating Fonterra hasn't provided any benefits to domestic consumers, in fact it has only benefited ex politicians (and offshore shareholders) who coincidentally invested in companies Fonterra was obligated to provide subsidised milk to.
Regulation of the NZ dairy industry reflects poorly on the politicians and there lack of insight, along with current leaders of the industry and farmer shareholders who believe in them, for letting it happen.
On behalf of a grateful NZ, I would like to thank Fonterra for providing low decile schools access to "Breakfast in Schools', and look foward to other substantial NZ companies doing likewise.
Why do we need these "Consumption Temples" with a population of 4 millions ??!!
Back to daily/ weekly "Farmers markets" guys - where the most different hands are shaken for a good and fair deal - looking into each other eyes - farmers and chair- polishers.
As an agriculture nation - New Zealand could be one of the “Food Baskets” in the world - providing affordable prices for all of us. We do have the land, the climate, the water – hmmm something missing here !!!!
Fruits from NZ are cheaper in rich Switzerland then here ?????!!!!!!!
Smaller nations have to think smaller, but with bigger ideas - a "100%NZpure economy"
With the upcoming worldwide economic/ financial downfall, I suggest a number of "Consumption Temples" throughout the country could be transformed into nice apartment houses - incl. educational, pools and other sport facillities.
Smaller nations have to think smaller, but with bigger ideas - a "100%NZpure economy"
Why doesn't Fonterra substantially undercut Goodman Fielder and supermarkets with domestic milk supply? I mean it's only 5% of what we produce.
I lament the leadership that bowed down to the government and commerce commission at the time Fonterra was formed. It seems government regulation has done nothing for the NZ consumer, and is only undermining Fonterras ability to compete globally.
Whatever happened to the bad old days when local dairy farmers were on town milk supply contracts, and they supplied all their milk to the local milk factory? They processed it, bottled it and sent it out with 3rd and 4th formers every morning for home delivery.
I can still hear the sharp sound of milk bottles on the street and cold and frosty mornings while I was warm and half asleep..........
We actually need competition in this market, The gov did it with the telco industry, and they now need to do it with dairy.
Fonterra have issued a 'price freeze'. But what if the wholesale price plummets, are they then going to lower their prices, or keep oit frozen. It makes me feel uncomfortable when a company does that sort of thing, becuase it shows that something isn't right.
I think the gov should set policies that prevent these sorts of mega companies from being created\, or getting into a monopoly position in the market.
Pricing the Fonterra Way
Based on 2 Litres Milk costing $4.60 at a supermarket, there is $0.60 of GST so the Nett Price is $4.00/2 Litres for our purposes.
Assuming this is Whole Milk, straight from the cow with no cream/fat removed, and was reduced to Whole Milk Powder (WMP) there would be about 260 grams (13%) produced. ( 2 Litre = 2 Kilogram times 13% = 260 grams)
The $4.00 for 260 grams of WMP represents a return of $15,384 NZD / Tonne. ( $4.00 divided by 0.260 Kilograms = $15.384 / Kilogram times 1000 kilograms = $15,384 / Tonne )
At the current NZD/USD exchange rate of $0.7616 this converts to $11,716 USD / Tonne. ( $15,384 times 0.7616 NZD/USD )
The milk being sold at the supermarket is probably closer to Skim Milk with about 9% milk solids. If this correct, then using the above costing method, then the return is $16,924 USD/Tonne.
At 13% Milk Solids $US 11,716 / Tonne
At 12% $US 12,693 / Tonne
At 11% $US 13,847 / Tonne
At 10% $US 15,232 / Tonne
At 9% $US 16,924 / Tonne
At 8% $US 19,040 / Tonne
Fonterra proudly announced getting an average $US 4,246 / Tonne at its last online auction. This is how Fonterra declares its pricing, hence the calculations above converting a 2 Litre of Milk to USD / Tonne.
Assuming the milk at the supermarket is about 9% Milk Solids, then the New Zealand consumer is paying about 4 times the international price for their milk. Fonterra and the supermarkets are probably achieving $US 5000+ / Tonne each in margin when selling the milk.
Remembering history 2 events come to mind -
1. At one time only Dairies could sell milk and Supermarkets were not allowed. Then legislation was passed around 1990 to allow supermarkets to sell the milk. From the supermarkets point of view this was wonderful because it made customers come to the supermarket. Now they are playing it both ways - customers have to go the supermarket to get milk and milk probably has the highest profit % in the shop.
2. When Tui and Mainland were assimilated into Fonterra there was concern that this would be to the disadvantage of NZ Consumers. Promises were made and it appears to me, promises have been broken.
It will be interesting to see if New Zealanders wake up and deal with this issue. Essentially we have a small group of people in NZ profiting from the many. The problem is that this profiteering is at the cost of the health of our children and grandchildren.
I can buy Magnolia , Nestle or Cowhead brands of UHT milk in 1 litre cartons , from NZ , for just 61 pesos , under $NZ 2 ! ........ And I live out in the " sticks " , in the Visayas Islands , Philippines .
.......... Why does it cost more than that in the Countdown Supermarket at the Northwood Supa Centre , Christchurch .? ............
One Kg of milk solids (approximately 12 litres of raw milk) typically produces 1.75 Kg of WMP (26% butterfat) plus 0.110 AMF plus a small amount of buttermilk, but needs the addition of some lactose.
NZ standard milk is 3.3% butterfat - raw milk from the cow is 4.8%.
I don't think you will find milk in a NZ supermarket with a fat content higher than the 3.3% standard.
Perhaps a solution would be to use the DIRA review to make it compulsory for all dairy processors to contribute some product to the domestic market - then watch the likes of Synlait and OCC squeal. Or perhaps Fonterra should just say - 'this is too hard, we are a private company subject to to much government regulation so like all the corporates we will only stick to export product.
Fonterra is taking a bit of stick here but I don't see too much being written about the supermarkets in all of this. Fonterra shares it profits between 10500 suppliers the supermarket shares it between how many?
Part of the reason for the demise of the 'Town milk' companies, was that the likes of Progressive and Foodstuffs stopped dealing with them. They stopped negotiating on a local basis for milk supply and chose to negotiate for regional supply.
"Or perhaps Fonterra should just say - 'this is too hard, we are a private company subject to to much government regulation so like all the corporates we will only stick to export product."
I think we all know that fresh dairy products is where any dairy industry's best margins are. A couple of questions are:
a) why are those margins so high in NZ
b) how those margins are being shared between the distributors and retailers
That we likely still have effective duopolies of both distribution and supermarket chains may provide some answer to the first question.
Fonterra farmers are forecast to receive 60 cents a litre this season this includes the profit from fonterra. If someone is price gouging its the supermarkets. As has happened overseas supermarkets have cornered the food market by first squeezing the small operators out of the sector and now they are profiting!
an economist at the Bank of New Zealand points out a dairy industry truism: “When you get quite a tight market and stocks are on the low side, it doesn’t take much of a change in outlook of supply to create volatility. You’d be unwise to think…volatility isn’t going to be around for a while.” So, once again, it seems merely to be a matter of supply and demand and who is better situated for getting the business. On that note, the weakness in the U.S. dollar continues to make U.S.-sourced dairy products an attractive option. From the States >>>> Total milk production is reported to be 235 million lbs more than December and 365 million lbs more than last January. The year to year increase amounts to 2.28%. While the increase in number of milk cows in December was a surprise, this month’s report was not. About 50,000 more dairy cows were culled in November and December than a year earlier; they were replaced with 66,000 fresh cows. In January about 35,000 more cows were culled than a year earlier (back then CWT’s herd retirement program was busy clearing some away) and they were replaced with 51,000 fresh cows. Producers can count; high beef prices and relatively low heifer prices apparently add up to short term profits per trade-out. CDFA’s cost of production figures show a high rate of culling in California. But what about the additional cows? That’s answered by noting producers can also see and read about the higher milk prices coming on fast. It looks like the race between higher milk prices and higher feed costs is where our eyes should be focused. Considering the near all time record increase in production per cow last year, this year’s increase per cow should be considerably lower. January’s increase was 5 lbs per cow lower than where last year began. The twenty-three largest milk producing states had 82,000 more cows than a year ago. That means the large are getting larger and the twenty-seven smaller producing states are going the other way, milking 14,000 fewer cows than twelve months ago. Once again, California and four (smaller) Midwestern states are the only ones among the 23 largest producers who still (or, now) have fewer dairy cows than they had a year ago. California’s production per cow in January increased by 25 lbs, about the average of the other 22 largest producers, and was exceeded by only 5 others. That additional amount of milk means, of course, that more butter, powder, and cheese will have been produced in January than a year earlier and a month ago. http://theautomaticearth.blogspot.com/ My reasoning for predicting a commodity top in the not too distant future is primarily that sentiment towards commodities is at an extreme. When the received wisdom is that something is highly desirable and can therefore only go up, the vast majority will have already made the investment decisions that drive markets in the prevailing direction. When sentiment is at an extreme, it generally pays to take the other side of the bet. The time to buy is when the received wisdom is that doing so would be folly. At that point, whatever it is will be cheap.
Commodities top on fear of scarcity, and that is exactly what we are seeing now for oil, gold, silver and agricultural commodities. An unfortunate dynamic sets in under such circumstances. Speculators see momentum develop and begin to pile into the sector chasing that momentum. This rapidly drives prices higher by creating artificial demand. As with all market moves, the resulting speculative fever is grounded in ponzi dynamics, meaning that only those who get in early and out early will make any money. http://www.oftwominds.com/blogfeb11/2020-crisis2-11.html
Beyond the False Dawn: Global Crisis 2020-2022
Agree with you 100%. Considering we sell our dairy products to the poorest people in the world, the prices are unsustainble. So along with the huge lift in production driven by high prices there will probably be a sudden drop in demand. Dairy is only new to the shopping list in China, they dont consider it an essential.
I agree....this is not the time to be buying into equities...Bernanke's efforts are all about faking the numbers...meanwhile his destruction of the dollar is driving inflation....the markets have decided they have had enough of the lying scamming rorting bullshit from govts and reserve banks everywhere...expect interest rates to rise and the recession to deepen.
Stay away from debt. Grow your own. Make stuff last longer. Discover the black market.
Take extra care right now because the orchestrated effort to scam the public into borrowing again will reach fever pitch.
Excellent interview ( Andrew Patterson ) with Prof. Niall Ferguson , played on Radio Live this morning . ........ . Ferguson believes that Bernanke will do whatever it takes to keep the US stockmarket inflating in price . And that all the good work in the 1980's by Paul Volcker to wring inflation out of the system will soon be undone .
......... The key is " sentiment " . ...When individuals believe inflation is here , they'll act in ways such that it becomes a self-fulfilling prophecy
"Shilling recommends shorting the currencies of the major commodity producing countries, namely Australia, New Zealand ...Industrial commodities will be hit first (e.g. copper, iron ore, etc), followed by agricultural commodities....Shilling singles-out Australia in particular..."
http://macrobusiness.com.au/2011/02/gary-shilling-on-china-commodities-and-the-aud/
The statement that this Price Freeze will affect Fonterra's Payout is absolutely wrong. The Payout will or should remain stable and maybe could even increase a little. But as a previous person has noted only about 5% (or Less) of the total Milk Volume produced is consumed within New Zealand. 95% of the Products are Exported, so these export prices predominate the Total Payment returns to Fonterra and so on to their Dairy Farmer supplier/shareholder/owners of the Co-operative. Fonterra is and has always been very carefully with its payout predictions and tends not to have a situation where the Payout reduce.
The current price that the Fonterra Supplier/Farmer receives for his milk, with an average fat test of (4.3%) and total solids of 13.4% is currently 99 cents per litre at the Farm Gate. This Price is based on the Current Fonterra Season 2010/2011 Payout.
This therefore becomes close to the cost price to the Processing Company---eg Goodman Fielder (Meadowfresh) or Klondyke or Anchor Milk.
The bulk of the Milk consumed in NZ is Standardised Homogenised Milk with Fat Test reduced (fat test is 3.3% w/w). The Cream removed from the Whole Milk can be sold as cream and add more value to the Processing company.
The Process of Pasteurised Homogenised Milk requires --Standardisation ( Cream/fat Reduction) Pasteurisation (heating) and Homogenisation, all of which are not a huge cost of equipment compared to the costs of a Plant to make say Milk Powder or the costs of making cheese. The liquid milk is instantly saleable after processing and packaging. But so is milk powder, but not cheese with its maturation time.
So essentially we have a cost price of the Liquid Milk, from the Farm at this time at say around One $1 per Litre. The rest of the Price is made up of Transport, Processing, Packaging, Refrigeration, Processor Profit Margin, Transport to the Point of Sale, Profit Margin of the Retailer (Supermarket, Dairy, Petrol Station, etc) and GST.
'But as a previous person has noted only about 5% (or Less) of the total Milk Volume produced is consumed within New Zealand.'
At Fonterra we have some very astute businessman who have had years to optimise their business and how to sell it to the public.
OK, lets take as a fact that 5% of the milk produced in New Zealand is sold within New Zealand.
Lets also assume that the costing model calculations for the profitability of domestic milk sales that I wrote earlier are mostly correct.
Then Fonterra is achieving at least double the export return on the milk solids when selling milk on the domestic market. So instead of achieving $US 4246 / Tonne when exporting, they may be getting at least $US 9000 / Tonne on this domestic milk.
Now lets look at other dairy products. I would expect the return on other diary products such as Cheese, Yoghurts, Specialised Milks, Ice Cream etc to be higher than the return being achieved on Milk Sales. Maybe $US 13000 / Tonne or even $US 18000 / Tonne.
If the above suppositions are correct, even though only 5% of production goes to the domestic market, at least 10% of the payout to farmers is coming from the domestic market. This percentage may be even higher at 15% plus.
This may explain the sensitivity of dairy farmers to what goes on in the domestic market. If sales are dropping then profits are dropping and their payout is dropping.
The exporting business is tough. You are subject to traders, exchange fluctuations, insurances, shipping companies, trade restrictions, duties etc. In a way the export market is almost lawless - the main law is the law of cash in the bank. Fonterra will not be achieving $US 4246 / Tonne across all its export markets.
On the other side of Fonterra are the dairy farmers that work hard, need major finance and good weather and are very sensitive to the milk payout price.
In my opinion Fonterra has become used to using the domestic market to pad out its payout and this practise has become institutionalised.
National doesn't have the balls to deregulate the dairy industry Aj. Too many of them and their mates are involved in the corporate processors.
To make a level playing field in NZ all corporate dairy processors should have to accept supply from any farmer that wants to supply them, as Fonterra has too. Much is made by the corporates of DIRA being necessary to ensure choice for farmers in who farmers supply. Farmers have NO true choice who they supply because corporates can and do, refuse to accept supply. The corporates and others then have the audacity to state that Fonterra is 'too big, monopolistic' etc.
If the domestic milk market is such a cash cow as is being mooted here, how come the corporate processors haven't jumped in on the bandwagon?
interesting debate re milk prices---these two links are woolies online catalogues for milk products--the 1st one is a nz woolies---the second a northern Brisbane---a quick calculation suggests Brisbane is paying about 60c a litre less and yet we have bugger all dairy industry---the $ 1 p/litre war is not part of my calc,s---
nz woolies
http://www.woolworths.co.nz/Shop/SearchProducts?search=milk&page=2
brisbane woolies
Milk went up in price !
Nah, doesn't worry me - I drink beer and have it with my cereals every morning. Beer is food and better for you! Lots of vitamins and has no methane in the production process! And I can produce it myself rather than lining some rich farmers pocket!...
Reply to COLIN RIDEN --- on the Milk Price Calculation.
Fonterra started the 2010/2011 Season by announcing a Payout (monthly Payment) of $6.90--$7.10. It may change a little during the season but usually never goes down.
I based my calculation on $7-20 per Kg Milk Solids. ( A little on the generous side)
Whole Milk contains 13.4% Total Solids w/w. or 13.4gms per 100gms. Since 1 litre of milk has a density of 1.032 kg/litre.
13.4 gms Milk Solids per 100 gms Milk.
Since I Litre of Milk has a density of 1.032 or 1032gms per litre.
13.4gms/100gms x 10.32 = 138.29 gms Milk Solids / litre Milk
Since Payout is $7-20 per Kilogram of Milk Solids.
$7-20 x 0.13829 = $1.00 per Litre.
I have essentially calculated the Value of the Milk Solids in 1 litre of Whole Milk.
At Interim Payment of $4.30 / kg of Milk Solids -
= $US 3274.88 / Tonne of Milk Solids ( $NZ 4.30 times 1000 kilograms times 0.7616 NZD/USD Exchange Rate )
At Projected Rate say of $6.90 / kg of Milk Solids -
= $US 5255.04 / Tonne of Milk Solids ( $NZ 6.90 times 1000 kilograms times 0.7616 NZD/USD Exchange Rate )
This raises an interesting question -
If Fonterra only now have just achieved a record $US 4246 / Tonne at their international auction, how can they be paying their suppliers a 25% higher figure ?
Access to a set of annual accounts and monthly international auction prices could be useful to run out some better numbers.
The commodity products contain more than just milkfat and protein. For example the composition of wholemilk powder is about 27% milkfat and 26% protein, the rest is made up of lactose, ash and moisture. Thus a tonne of wholemilk powder contains about 53% milksolids so a price of $US 4240 per tonne of wholemilk powder @53% milksolids equals US$ 8000 a tonne of milksolids. Hopefully that explains your anomally
Fonterra pays for milk on the fat and protein only. The lactose and ash components do not enter the calculation. The fat and protein are priced separately but with a heavy weighting to the protein.
When Fonterra talks of a price per Kg of milk solids it is referring to the fat and protein component of an average component milk - and before any deductions are made for a number of aspects of milk quality such as somatic cell count.
If you want the national stats for the 2009-2010 season they are:
16.483 billion litres of milk
1.438 billion Kg of milk solids
0.817 billion Kg of milkfat
0.622 billion Kg of protein
The average milk solids per litre will therefore be about 8.72%, fat 4.95% and protein 3.77%.
Jack and Joa, could you please explain where you get your information on composition, which you use in your calculations. Is the composition percentage 100% nutritional, and therefore of value?
Hopefully Colin Riden will respond and put us right, because I suspect you're mistaken in your calculations.
Jack, you are way off on your compositon. Fonterra pays for fat and protein, nothing else, and then calls this the mik solids price, off course there are other solids in milk, ie lactose, but farmers are not paid for these. It is clever how you come to your milk price so easily when fonterra used a working group and consultants to determine a milk price when arguing against the DIRA rules around supply to other competitors. Your assertions are so far off I can only assume you have no knowledge of the dairy industry. Also to clarify other comments, farmers can supply who ever they like and can also supply a % of their supply to other companys whilst also being supplier/shareholders to fonterra, so they could sell fresh milk to anyone if they so desired, although it would have to be processed first of course.
I would be first to admit that I do not know a lot about the Dairy Industry but I can do arithmetic.
So, is Ploughboy's 8.3% about right as far as a Dairy Farmer is concerned ?
I just had a look at a 2 Litre of Countdown 'Home Brand' Lite milk in the fridge which was purchased for $3.60 including GST. The label says it contains 3.7 grams of Protein / 100 ml and 1.5 grams of Total Fat. This adds up to 5.2 grams / 100 ml or approximately 5.2 % of Milk Solids from a Dairy Farmers point of view.
Composition of Cow's Milk
Fat...................; approx 4.3%
Protein............. 3.4%
Lactose.......... 4.9%
Ash................. 0.7%
Citric Acid........ 0.2%
Water............... 86.6 %
There are other biological products in milk such as lactoferin, etc, but their amounts are very small.
The above composition would be for Friesan Cow Milk. Jersey Cow milk would be higher in fat and protein and have less water.
If For example Skim Milk Powder was to be made ---then the Fat as Cream, some water, some solids would be removed ----- but essentially
For the benefit of one reader---- Lactose is a big component of Skim Milk Powder and Whole Milk Powder. It is not taken out. Whole Milk Powder may have nothing removed, (unless a special Fat % is required ) but may have a special product sprayed onto the dried powder to give it Instant Powder dissolveability properties if Instant WMP is to be made.
For the Purposes of Pricing Milk Payment: Milk Fat is regarded as a Milk Solid.
So Milk Solids are regarded as the Total Milk Solids in the Whole Milk ---- even though some people might not think Milk Fat is very solid.
Pricing the Fonterra Way #2
After gaining a better understanding of how the Dairy Farmers are paid and how the international Whole Milk Powder pricing compares with this, here is a rewrite of 'Pricing the Fonterra Way'.
Based on 2 Litres Milk 'Home Brand Lite' milk costing $3.54 at a Countdown supermarket on 21st Feb 2011, there is $0.4617 of GST so the Nett Price is $3.0783/2 Litres for our purposes.
The Dairy Farmer is paid by Fonterra for the Protein and Fat content, so reading the 'Nutritional Information' on the outside of the bottle, this milk contains 3.7 grams of Protein and 1.5 grams of Fat per 100 Milliltres. This converts to 104 grams of 'Milk Solids' as per how the Dairy Farmer is paid. ( ( 3.7 + 1.5 ) = 5.2 grams / 100 ml times 20 = 104 grams / 2 litres )
The $3.0783 for 104 grams of 'Milk Solids' represents a return of $29.60 / Kg. ( $3.0783 divided by 0.104 Kilograms = $29.60 / Kilogram ).
At the current NZD/USD exchange rate of $0.7612 this converts to $22,531 USD / Tonne. ( $NZ 29.60 / Kg times 1000 Kilograms times 0.7612 NZD/USD = $US 22,531 / Tonne )
When comparing the $29.60 / Kilogram with the projected payout to the Dairy Farmers this year of say $6.90, we get a ratio of 4.2 times.
Fonterra proudly announced getting an average $US 4,246 / Tonne at its last online auction. As a fellow poster pointed out Whole Milk Powder is 26% protein and 27% milkfat so to compare 'milk solids with milk solids' the international auction price is $US 8,000 / Tonne. ( $US 4,246 / Tonne divided by 53% ( 26% plus 27% ) = $US 8,000 / Tonne )
When the $US 22,531 / Tonne above is compared with the international price of $US 8,000 / Tonne, we get a ratio of 2.8 times.
Yesterday I visited a Countdown Supermarket and noted the price, protein and fat contents on a range of dairy products. The results of calculations as per above are as follows -
Milk
$29.60/Kg $US 22531/Tonne Home Brand Lite 2 L $3.54 (3.7+1.5)
$34.98/Kg $US 26627/Tonne Home Brand Trim 2 L $3.54 (3.9+0.5)
$47.43/Kg $US 36104/Tonne Anchor Mega 2 L $4.80 (3.9+0.5)
$26.81/Kg $US 20409/Tonne Anchor Super Blue 2 L $4.81 (5.0/2.8)
$41.01/Kg $US 31215/Tonne Signature Trim 2 L $4.15 (3.9+0.5)
$34.70/Kg $US 26413/Tonne Signature Lite 2 L $4.15 (3.7+1.5)
$28.19/Kg $US 21460/Tonne Signature Standard 2 L $4.15 (3.1+3.3)
Cream
$15.04/Kg $US 11447/Tonne Home Brand Cream 300 ml $1.93 (2.2+35.0)
$16.86/Kg $US 12833/Tonne Meadowfresh Cream 300 ml $2.28 (2.2+37.0)
$43.01/Kg $US 32740/Tonne Meadowfresh Lite 300 ml $2.30 (3.5+12.0)
These calculations are for the purpose of comparing what the consumer pays with what the Dairy Farmer receives and with Fonterra's international market. There will be all sorts of costs involved with manufacture, distribution and sales. However it would appear that someone is making a good margin as well, whether this is Fonterra or the Supermarkets.
Remembering history 2 events come to mind -
1. At one time only Dairies could sell milk and Supermarkets were not allowed. Then legislation was passed around 1990 to allow supermarkets to sell the milk. From the supermarkets point of view this was wonderful because it made customers come to the supermarket. Now they are playing it both ways - customers have to go the supermarket to get milk and milk probably has the highest profit % in the shop.
2. When Tui and Mainland were assimilated into Fonterra there was concern that this would be to the disadvantage of NZ Consumers. Promises were made and it appears to me, promises have been broken.
It will be interesting to see if New Zealanders wake up and deal with this issue. Essentially we have a small group of people in NZ profiting from the many. The problem is that this profiteering is at the cost of the health of our children and grandchildren.
"...at the cost of the health of...." blah blah blah
Fair go joa....enough of the BS....the wholemilk drink is affordable but too many opt to guzzle crap soda muck and stuff rubbish in their cake holes...encouraged by lumps of lard that call themselves parents.
Get off your soapbox and take a long hard look at the behaviour and attitudes of the morons out there before you rant about some sort of socialist price control madness.
The economy could be in for a $450 million shot in the arm today with directors of dairy giant Fonterra expected to significantly bump up this season's milk payout forecast.
Wow, that’s great news. We finally see some money spend on fencing off and cleaning up waterways, etc. by farmers - in stead of the taxpayer paying for the costs of "Dairy Farmers NZpollution".
http://www.stuff.co.nz/business/farming/4685504/Hopes-for-450m-boost-from-Fonterra
John Campbell interviewed the NZ manager of Pak'n'Save last night . The manager claimed that his supermarkets target profits of between 10 and 30 % on dairy products , across the range ( milk / yoghurts / cheese / butter / etc ) .
.......... People forget that the supermarkets have costs to cover , such as rates / rent / electricity / wages .............. It isn't all pure profit to them . They are a business . And 'like any other in NZ , are socked by a raft of compliance costs and regulations imposed by the government ........., taxes , ACC , etc .
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.