The price of butter

When global dairy prices rise, so does the price of butter. Farmers sell milk to whoever will provide the best price. Producers will ship products to wherever returns are best. When people start seeing butter as a health food compared to stuff made of oils, demand for butter goes up - and New Zealand produces a lot of the world's trade product. 

Ministers of Finance should not be involved. 

It will whet populist demand for more of the same whenever prices rise for other things. 

The meeting this week with the head of Fonterra was set earlier, but turned into a media circus framed around the Minister holding Fonterra accountable for butter prices. It then turned into a supermarket beat-up over what the Minister thought might be ten or twenty cents on a block of butter. 

I am a very big fan of enabling more supermarket competition by easing regulatory barriers. If there are super-profits to be had in NZ grocery retail, someone can then enter to chase them down. 

I just can't see it doing much on the price of butter though. For a pretty specific reason. 

In the 2000s, there was a similar beat-up over milk prices. At the time, Al & Sons was selling much cheaper milk at corner stores (dairies) in Christchurch. I'd regularly buy two 2-litre bottles for the price of one normal-brand bottle at the supermarket. 

Some prices are particularly salient. Butter. Milk. They're the kind of thing that dairies can stick placards up at the door about. And that's how I'd go and find Al & Sons. A dairy on my drive home through Woolston had the placard up advertising cheap milk, so I'd pop in and buy some and maybe a couple other things. 

Butter is at least as salient as milk, given the current fooferah.

So. 

Let's think it through. 

Imagine you believe the problem is Fonterra. If it is, that's an obvious opportunity for anyone who might want to undercut Fonterra by selling cheaper butter. There are lots of producers out there. And there could be more. NZ regulations require Fonterra to sell milk to competitors at a regulated price. If you want to start up your own butter company, you don't have to buy a pile of trucks to go start collecting milk. You can just get it on tap. 

So it isn't gonna be a Fonterra thing.

Maybe you figure it's really a dastardly supermarket thing. They've rigged the whole game and told every butter producer that they'll never buy another block of butter from them if they sell to anyone who'd sell it at a lower price. I don't buy any of that. But suppose you believed that were the true state of the world. 

Now remember Al & Sons. They didn't bother with the supermarkets. They just sold through the dairies. If you want to set up a butter plant selling only to dairies, that's perfectly fine. Nobody will stop you - but you will have to comply with the health regs. Al & Sons folded, I think, after the combination of the Christchurch earthquakes and a tightening of health standards made everything too hard. 

But there are lots of other operators. Any one of them could decide to flip to a dairies-only strategy if the supermarkets were creaming things too much. Whatever excess margin they figure the supermarkets are taking, they could split between themselves as producers, the dairies as retailers, and customers through lower prices. Dairies could set up the placards outside. Cheap butter would attract punters in. 

I expect that the government has to understand this, otherwise they wouldn't have referred to about ten to twenty cents in potential savings on a block of butter costing in the $8-$10 range. That may not be a margin large enough to encourage anyone to flip to a dairies-only distribution strategy. Which seems prima facie obvious given that nobody is putting up 'cheap butter here' placards outside of dairies. 

And surely this isn't the reason to oppose poking holes in GST. It must be the journalist not quite getting it right, right?

Both Australia and the UK do not apply GST (or its equivalent) to basic goods including milk and butter. For example, an $8 block of butter in New Zealand would cost about $6.96 if GST were removed. However, Willis has ruled that out, arguing it would effectively act as a subsidy for supermarkets, with no guarantee savings would be passed on to consumers.

Taking GST off butter would be a terrible idea regardless of incidence. 

Meanwhile, our grocery commissioner considered that Woolworths was being sneaky in pointing to GST as something that needed to be accounted for when making international price comparisons.

"Just as an aside on that pricing; It's a bit sort of sneaky, to say if you take GST out, and if you do this, and if you do that, and do a few fancy arithmetics, we are cheaper than others are."

The Commissioner is just bad and wrong here. If the object of the comparison is to tell whether prices in one market are roughly competitive with prices in another market, you have to adjust for differences in tax. 

Greater supermarket competition could well reduce prices to consumers across a large shopping cart full of goods. But it's not likely to do as much on any individual product - and particularly not one like butter where prices are particularly salient. It's more typically the kind of thing where a retailer might run thin margins to get punters in the door - and potentially risk being damned for an anticompetitive 'aggressive loss-leading' practice. And taking a international spike in butter prices as reason for raking companies over the coals is a bad idea. It whets demand for populist responses to other price changes. 

Bring on the price control boards, because that's where this path leads. Some days, I wish National and ACT were in opposition, simply so that there would be push-back in Parliament on this sort of thing. 

I drew the third slot in our Insights newsletter this week; it's meant to be a satirical take. 

I wrote this. It has been such a stupid week. 

Buttering up a slippery slope

You might not remember 2025, even though it’s only two decades ago. AI was only just getting started. Looking back, it is easy to tell where the path back to price setting boards started. 

This was before synthetic fermentation, when New Zealand still exported a lot of butter and global markets set the price. Whenever butter prices dropped, consumers barely noticed. Whenever they rose, people screamed. 

The orthodox economics still practiced elsewhere, and back then, sometimes even in New Zealand, offered an obvious solution. When global dairy prices rise, farmers make more money and pay more tax. Government collects taxes and gives money to poorer people, with payments adjusted for inflation. People then decide what to buy. 

Unfortunately, some prices draw a lot of attention. The spike in fuel prices during the 2020-2022 pandemic saw the government subsidise road users. People started to think that the government should step in whenever prices increase.  

That populist turn solidified under the 2023-2026 National government.  

A July 2025 meeting between the Finance Minister and the head of a large milk company caused a media frenzy about butter prices, followed by condemnation of supermarkets. Both drew popular applause. 

Things slid from there. People came to expect public excoriation of businesses whenever prices increased unexpectedly.  

In short order, the Minister was having to devote two or three days every week to these circuses. It was seriously impeding other government business.  

So, the Minister delegated the job to a new Board established to supervise prices and to bring a more formal bureaucratic process to the inquisitions.  

The new Labour-led government in 2026 kept the Board but broadened its role. It was more convenient for everyone involved.  

Previously, anyone reducing prices risked prosecution for predatory pricing. Anyone increasing prices had to be gouging. And keeping prices the same was obviously collusion. It was a risky time. 

In the new order, the Board and the businesses it supervised agreed on prices for the next year. Officials viewed government-enforced price coordination as obviously beneficial.  

The real cost of everything rose considerably. Shortages of some things and surpluses of others abounded.  

Government had first call on short supplies of butter and often used it for industrial purposes. It is a fine lubricant, useful for making slopes more slippery. Most of the rest was exported. 

But at least the prices listed on the empty supermarket dairy shelves were low.