The July 2008 issue of Price Index News looked at The rising cost of food in New Zealand and examined the rising costs of dairy products in New Zealand and internationally. This article updates the story, exploring how dairy prices have moved over the past year.
The year to the March 2008 quarter
The rising cost of food in New Zealand examined the increase in food prices in the year to the March 2008 quarter. The food group of the consumers price index (CPI) increased by 5.1 percent over the year, with some of this increase attributed to an 8.7 percent rise in the price of grocery food. Much of this increase came from increased dairy product prices. The food price index (FPI) showed large price increases for fresh milk (up 22 percent), cheddar cheese (up 59 percent), and butter (up 80 percent), in the year ended in the May 2008 month.
These increases in consumer prices were consistent with increasing dairy export prices. The merchandise export price index for dairy products showed that dairy export prices rose 63 percent in the year to the March 2008 quarter.
Internationally, food consumer prices also increased. Overall food prices in the United States, the United Kingdom and Australia all increased at levels comparable with New Zealand's. However, although dairy prices were increasing well above the rate of overall food inflation in each of these countries, New Zealand's dairy price increases were larger.
Although these dairy price increases were high, they have historically moved cyclically. Increased dairy prices were recorded in New Zealand in 2001–02, and again in 2005–06. In both cases, prices fell in the subsequent quarters. Following the 2005-06 increase, prices fell to levels prevailing before the increase.
Food prices continued to increase after the March 2008 quarter
The food group of the CPI rose by 9.8 percent between the March 2008 and June 2009 quarters, and the grocery food subgroup increased by 9.5 percent over the same period. As figure 1 shows, grocery food prices are now moving in line with the overall food group. However, both the food group and the grocery food subgroup are now showing signs of easing, with smaller increases in the past three quarters for the food group, and in the past two quarters for the grocery food subgroup.
Figure 1
The milk, cheese, and eggs class of the CPI increased 2.0 percent between the March 2008 and June 2009 quarters. Over the March 2009 and the June 2009 quarters, the class fell 2.8 percent in total.
Individual dairy products have also reached the peaks of their cycles, and have begun to decrease in price, as shown in figure 2.
Figure 2
Prices for butter peaked in February 2008, and have since fallen in 12 of the following 18 months. Butter prices have fallen 31.0 percent since February 2008 when they reached an average price of $3.83 for the cheapest available 500g block at the time prices were collected. In August 2009, the average price was $2.64. Butter prices are still 30.6 percent higher than they were three years ago - in August 2006.
Fresh milk prices peaked in August 2008, where they reached an average price of $3.36 for the cheapest available two litre bottle of standard milk. In August 2009 the average price for the same product was $3.19. In August 2009, the price of fresh milk was 4.8 percent lower than in August 2008, but 7.7 percent higher than in August 2006.
The price for cheddar cheese reached its peak in September 2008. Between September 2008 and August 2009 the price fell by 25.1 percent, with the average price for the cheapest available one-kilogram block falling from $11.19 to $8.38. Cheddar cheese prices are still 23.7 percent higher than three years ago in August 2006.
These price falls are consistent with the cyclical nature of dairy price movements observed in the past.
Exports peak in the December 2008 quarter
The merchandise trade export dairy products price index reached its peak in the December 2008 quarter. This is the highest level since the series began in 1950. In the two quarters since, the index has fallen by a total of 39.2 percent. This is a result of a 19.9 percent fall in dairy export prices in the March 2009 quarter, and a 24.1 percent fall in the June 2009 quarter, as shown in figure 3. The index is now 23.2 percent lower than it was at its peak in the September 2001 quarter, but 18.4 percent higher than it was five years ago, in the June 2004 quarter.
Figure 3
International prices follow a similar pattern
International consumer prices for dairy products seem to follow a similar cyclical pattern. This is most obvious in the United States, and less so in the United Kingdom and Australia.
The dairy and related products component of the United States CPI, peaked in August 2008, but has fallen by 9.6 percent between then and June 2009.
Decreases in dairy prices have not been as pronounced for British and Australian consumers. The dairy and related products component of Australia's CPI has only just begun to fall, falling 1.3 percent in the June 2009 quarter. Prices were 4.6 percent higher in the June 2009 quarter than they were in the March 2008 quarter. In the United Kingdom, the milk, cheese, and eggs component of their CPI peaked in March 2009, and has subsequently fallen 1.0 percent between then and June 2009.
Will dairy product prices continue to fall?
While dairy prices have recently reached record highs in New Zealand, and throughout the world, prices are starting to decline. Individual dairy product prices, as measured by the FPI, and export prices for dairy products have fallen sharply from their highs. International consumer price indexes are beginning to show signs of declining dairy product prices. However, prices are not yet back to previous levels, so the coming months will indicate whether the falls experienced so far will continue, or whether prices will remain at relatively elevated levels into the future.
Back to Price Index News: October 2009