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Tracking milk prices in the CPI

Introduction

This article looks at retail milk prices from the 1890s to February 2011. The article is based mainly on information collected for the consumers price index (CPI).

A quart or a pint for a few pence

In the 1890s, a quart of milk (equivalent to 1.137 litres) retailed for just over 3 pence on average (which is under 3 cents in decimal currency terms). By 1915, the average price of a quart had risen to about 4 pence, and then by June 1950 the price had doubled to 8 pence.

In 1956, the bottle size tracked in the CPI changed from a quart to a pint. At the time of the change, the quart average price was about 9.2 pence, and the pint average price was about 4.6 pence. The pint average price changed very little for the next 11 years until 1967, when decimal currency was introduced. From July 1967, milk sold for 4 cents a pint, which was about 3 percent higher than the pre-decimal currency average price of 4.64 pence per pint. Four cents a pint in July 1967 is equivalent to 65 cents in February 2011 (or $2.29 for 2 litres), after allowing for general food price inflation.

A metric pint for 4 cents

In 1975, the bottle size tracked in the CPI was formally changed from the imperial pint (equivalent to 568ml) to the metric size of 600ml. At that time, the average price of the 600ml bottle was 4.01 cents (equivalent to 39 cents – or $1.31 for 2 litres – in today’s terms). In fact, there had been a 20-month transition period, starting in 1972, during which both the old 568ml pint bottles and the new 600ml bottles were on the market at the same price. This additional volume for the same price was shown in the CPI as a gradual price drop in seven steps, from 4.01 cents per 568ml pint in September 1972 to 3.79 cents in March 1974 when the transition was completed.

Industry regulation

The New Zealand town milk industry was reorganised in the 1940s. A Milk Commission report (1944), the 1944 Milk Act, the Central Milk Council (established in 1944), local milk authorities, and the Milk Board (1953) were all involved in shaping how the industry operated. There was central setting of producer and consumer prices. A government subsidy was paid to make up the shortfall between the two prices. The fixing of prices was lifted in 1976, followed by the removal of the government subsidy in 1985. Full deregulation of the domestic milk industry occurred in 1993.

An end to fixed prices

Figure 1 shows that the retail price of a 600ml bottle of milk doubled in February 1976 to 8 cents from 4 cents in January 1976. Eight cents in January 1976 is equivalent to 65 cents – or $2.17 for 2 litres – in February 2011, after allowing for food price inflation. Three years later, in April 1979, the price rose from 10 cents to 15 cents.

Figure 1
 Graph, Milk, monthly retail average price – 600ml, March 1975–December 1988.

There were further increases of 3 cents a bottle in February 1980, 3 cents a bottle in November 1980, 4 cents a bottle in August 1981, and 5 cents a bottle in June 1982, which took the price to 30 cents. The price remained at 30 cents a bottle through the 1982–84 wage/price freeze. The price next rose in March 1985, to 35 cents a bottle.

The price of a bottle rose to 40 cents in September 1985, and then to 45 cents in October 1986 (equivalent to 93 cents – or $3.10 for 2 litres – in February 2011), when a goods and services tax (GST) of 10 percent was introduced.

Supermarkets and 1-litre cartons

Supermarkets were able to sell milk from 1987. In 1989, changes made to the package sizes tracked in the CPI included dropping the 600ml bottle and adding a 1-litre container. The 600ml price in December 1988 was 55 cents and the average price for the 1-litre container was 98 cents.

As shown in figure 2, the 1-litre price rose from $1.07 to $1.10 when GST rose from 10 percent to 12.5 percent in July 1989.

Figure 2
Graph, Milk, monthly retail average price – 1 litre, December 1988–93.
 

The rise of the big plastic container

After full deregulation of the domestic milk industry in 1993, milk could be sold at any price. By December 1993, the average price of a 1-litre container had increased to $1.21. At that time, a further change was made to the package size for which average prices were reported, from 1 litre to 2 litres. Prices were collected for both 1- and 2-litre containers, for delivered milk, and from supermarkets, service stations, and dairies.

In January 1994, the average price of a 2-litre container was $2.37 (equivalent to $3.78 in February 2011, after allowing for food price inflation). As figure 3 shows, the average price remained fairly steady, until November 1995 when it rose to $2.50. In the August 1998 month, there was a 7 percent increase, to $2.85.

Figure 3
 Graph, Milk, monthly retail average price – 2 litres January 1994–99.

The demise of home delivery and the impact of world prices

The home delivery system dwindled during the 1990s. After the CPI review was implemented in July 1999, 1-litre containers and home delivery were no longer tracked, and the sample of retail outlets and the relative importance of supermarkets against convenience stores were updated. This change caused a discontinuity, with the new sample's average price of $2.71 for June 1999 being slightly lower than the old sample's $2.83.

Milk prices from June 1999 to June 2006 are shown in figure 4. The average price reached $3.20 in January 2002 (following a high point for dairy export prices), before falling by a total of about 12 percent to $2.83 by February 2004 (when dairy export prices reached a low). The January 2002 and February 2004 prices of $3.20 and $2.83 are equivalent to $4.18 and $3.69 in February 2011, after allowing for food price inflation.

By June 2006, the average price had increased about 11 percent to $3.13, but was still below the level in January 2002.

Figure 4
Graph, Milk, monthly retail average price – 2 litres, June 1999–2006.
 

Prices peak in 2008 and then again in 2011

When the CPI review was implemented in July 2006, the sample of retail outlets and the relative importance of supermarkets against convenience stores were once again updated. In addition, a new 'geometric' way of averaging prices within regions was introduced. These changes caused another discontinuity, with the new sample's average price of $3.05 for June 2006 being slightly lower than the old sample's $3.13 (based on the cheapest available brand for standard homogenised (blue top) milk in each retail outlet at the time of price collection).

Milk prices from June 2006 to February 2011 are shown in figure 5. The average price fell to $2.66 in September 2006 from $3.03 in August 2006. The average price fell further, to $2.60 in June 2007, before a rise over the following 15 months to $3.37 in September 2008, reflecting a jump in world dairy prices.

Prices then drifted down to $3.16 during the period from September 2008 to November 2009 as world dairy prices fell from their peaks, before turning around and rising again to their highest level of $3.68 by February 2011. The price in February 2011 was 9.5 percent higher than a year earlier, and 42 percent higher than in June 2007.

Although the February 2011 average price is the highest recorded in ‘nominal’ terms, in ‘real’ terms prices have at times been higher in the past. For example, the average price of $2.37 in January 1994 is equivalent to $3.78 in February 2011, and the average price of $3.20 in January 2002 is equivalent to $4.18 in February 2011, after allowing for food price inflation.

Statistics NZ collects milk prices each month for the food price index and the CPI from about 125 outlets in 15 towns and cities around the country. About 75 are supermarkets, about 25 are service stations, and about 25 are dairies, grocers, or superettes.

In February 2011, prices ranged from $2.90 to nearly $6.00, with one in two prices being between $3.50 and $3.75.

If consumers had shopped around, they would have found the cheapest milk at dairies or service stations, but they may also have had to pay relatively high prices. Nine of the 10 cheapest prices (many of which were based on discounted prices for two containers) were at dairies, grocers, superettes, or service stations, while the remaining one was at a supermarket. However, seven prices were over $5.00, and these were at dairies, grocers, superettes, or service stations.

Five in 10 dairy, grocer, and superette prices were below the overall average of $3.68, compared with two in 10 service station prices. However, most supermarket prices were under $4.00, and eight in 10 were below the overall average of $3.68.

Figure 5
 Graph, Milk, monthly retail average price – 2 litres – June 2006 – February 2011.

Soon after prices were collected in February 2011 for the food price index and the CPI, there were announcements by Fonterra and by supermarket chains that domestic prices would not be raised for the remainder of 2011.

In addition to tracking the cheapest available brand for standard homogenised milk in each retail outlet at the time of price collection for the CPI, Statistics NZ has, since 2006, also tracked specific brands of calcium-enriched milk in 2-litre containers. The average price of enriched milk in February 2011 was $5.11.

Milk’s share of food spending

At the December 1974 quarter (when milk cost about 4 cents a pint), fresh milk accounted for about $2.50 of every $100 spent by households on food. By the December 1993 quarter (when a litre cost about $1.20), spending on milk had risen to about $5.20 of every $100 spent on food, and by the June 2008 quarter (when 2 litres cost about $3.25), milk spending had fallen slightly to $4.70 of every $100 spent on food. This indicates that the amount of fresh milk consumed fell relative to the amount of food consumed.

 

References

Moffitt, RG & Sheppard, RL (1988). A review of the deregulation of the New Zealand town milk industry. (Discussion paper no. 122). Canterbury: Lincoln College, Agribusiness and Economics Research Unit. Available from http://researcharchive.lincoln.ac.nz
Gilmour, S (1992). History of the New Zealand Milk Board. (Research report no. 216). Canterbury: Lincoln University, Agribusiness and Economics Research Unit. Available from http://researcharchive.lincoln.ac.nz
Smith, M, & Signal, L (2009). Global influences on milk purchasing in New Zealand – implications for health and inequalities. Wellington: University of Otago, Department of Public Health. Available from www.globalizationandhealth.com

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