Retail milk prices a storm in a latte cup

Federated Farmers believes any company receiving raw milk at the regulated price, concerned about retail competition, is free to install processing plant in order to supply liquid milk to consumers.

“I have no doubt that there are some who are using the retail price of milk as a lobbying opportunity to secure a commercial advantage,” says Lachlan McKenzie, Federated Farmers Dairy chairperson.

“Yet the Raw Milk Regulations under the Dairy Industry Restructuring Act (DIRA), mean Fonterra has to sell up to 600 million litres of its milk to other milk processors. This price is set at the farm gate price plus ten cents per kilogram of milk solids to cover seasonal costs.

“Translated into plain English and based on the current forecast milk price, that works out to be just over $0.66 a litre for regulated raw milk.

“Given a farmers share of around $0.652 a litre, Fonterra’s margin is some $0.0087 cents in every litre of the 600 million litres it has to supply other processors under DIRA

“$0.0087 cents is doesn’t go anywhere near meeting the opportunity cost to Fonterra shareholders in effectively providing their milk on speed dial. It’s robbing Peter to pay Paul especially at the tail end of the season, when milk supply tails off.

“With the notable exception of Goodman Fielder and some other processors, a majority of processors receiving regulated raw milk are processing it for export rather than supplying liquid milk to consumers.

“If there is a big market opportunity in fresh milk then there’s nothing stopping other processors from entering the local marketplace.

“It may have something to do with wholesale margins. After paying for and collecting milk from farms before processing and delivering a perishable product into stores, I understand Fonterra’s profit margin on wholesale milk bound for consumers is around 12 percent.

“Wholesale of course isn’t the retail price consumers pay in supermarkets because under law, Fonterra cannot set the retail price of milk.

“I just can’t see any evidence of a rip off. More so, when Federated Farmers compared local milk prices with what people are paying overseas,” Mr McKenzie concluded.

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