Why the $1 loaf of bread is a thing of the past
Tuesday, 10 August 2021
If you are sticking to the staples at the supermarket and still feel like your grocery bill is growing by the week, you are probably right.
After a high-profile review of New Zealand’s grocery market, the Commerce Commission recently confirmed what many shoppers had long suspected – we are paying too much for groceries.
While consumers expect and generally accept seasonal fluctuations in the cost of fresh fruit and vegetables (we seem to draw the line at $39 a kilogram for zucchini, no matter the season), other price hikes and perceived injustices at the checkout prove harder to swallow.
Perhaps the most talked about is the cost of red meat.
Over the past 10 years, average prices for several cuts have risen much faster than the rate of inflation as global demand for New Zealand beef and lamb sent farm-gate prices soaring.
The cost of beef mince rose from $12.05 in June 2011 to $16.03 a kilo in June this year, almost $3 more than the estimated price adjusted for inflation.
A kilogram of porterhouse or sirloin steak, which cost $25.52 in 2011, would have cost $29.75 in June if it had risen with inflation. Instead, it came in at more than $1 a kilo higher – at $30.87.
With more than 90 per cent of New Zealand beef and lamb exported, domestic prices generally follow those set overseas.
So, while New Zealanders in the United Kingdom love to grumble about lamb being cheaper in London, the difference is small.
Data from the UK’s Agriculture and Horticulture Development Board shows the average price of sirloin steak was £15.97 a kilo (NZ$29.82) in UK supermarkets versus $29.74 a kilo in New Zealand.
But while retail prices are relatively similar, the playing field remains uneven due to the dropping of farming subsidies in New Zealand in the 1980s.
Since then productivity has been the chief driver for Kiwi farmers, while subsidies remain in effect in Europe, the United States and many other countries.
Although the subsidies protect farmer incomes and make retail prices seem lower, consumers pay higher taxes to support them.
Other factors contributing to recent price rises included the impact of African swine fever on China’s pig herd, which triggered a global protein shortage and drove red meat prices to record highs.
It is no surprise, then, that statistics show New Zealanders are eating less red meat per capita while poultry consumption grows.
In the 10 years to 2010, poultry consumption increased 18 per cent. Over the following decade, consumption jumped a further 33 per cent.
While farmers have expanded their operations to keep pace with poultry’s growing popularity, New Zealand’s largest poultry supplier, Tegel, on Monday announced it would increase chicken prices by roughly 10 per cent this month.
The price rise was a result of pressures on the industry, including increased labour, feed and fuel costs.
“Kiwis have been enjoying low chicken prices since 2014 when chicken breast was $17 per kilogram, compared with as low as $7 today,” Tegel general manager of sales Yvonne Van Nes said.
“This is the first across-the-board increase we have done in some time, and it reflects the current cost of raising a chicken and distributing it to our network.”
Katherine Rich, chief executive of the Food and Grocery Council, said Tegel was dealing with concerns shared by many other businesses, including increasing energy and insurance costs, and should be commended for its transparency.
“Getting people to work in our factories across our supply base is really hard. If you have got the workforce you are still struggling to keep up with local production and there is more overtime.”
Tegel’s bill for chicken feed was also increasing as it became harder to get goods into the country, she said.
“I completely understand how shoppers dislike any kind of price increase but in this instance they have little choice.”
Beyond the butchery aisle, other staples are also taking a larger chunk out of the grocery budget, with even the cheapest bread – the “$1 loaf” – increasing in price at more than the rate of inflation.
When the bottom-dollar bread first landed on supermarket shelves in 2014, it sliced more than 50 cents off the average price of the cheapest loaf.
The bread quickly became a favourite with students, large families and anyone else wanting to cut costs on the staple item and within a year, Countdown had sold 19 million $1 loaves.
“Price is important to Kiwis, no matter who they are or where they live,” managing director Dave Chambers said at the time of the launch.
“We can't impact the cost of our customers' rent, mortgage or their power bill, but we have listened to what our customers want and can help families manage the cost of their shopping by delivering better value every day, like a loaf of bread.”
But after hovering between $1 and $1.10 for five years, the average price of the cheapest sliced bread jumped to $1.30 in September 2019 and has remained there or thereabouts ever since, according to Stats NZ.
If the price had risen at the rate of inflation, shoppers could expect to pick up a “$1.10 loaf” but as of Monday, a loaf of Essentials sliced white bread was $1.40 at Countdown, while Value white toast bread was $1.20 per loaf at New World.
However, the demise of the $1 loaf appears to be more of a price correction than anything else, with those in the know saying the bargain bread was far from a money-spinner for bakers even back in 2014.
Peter Rewi, then president of the New Zealand Association of Bakers, which represents both Goodman Fielder and George Weston who make the bulk of the branded bread in New Zealand supermarkets, acknowledged: “$1 bread is a good value for money product for the consumer but is unprofitable for bakers.”
Given the cost of raw ingredients, labour and all the overheads of getting bread to the market, Norm Holley, secretary for the NZ Bakers and Pastrycooks Union, said “there shouldn't be a loaf of bread in New Zealand under $1.80”.
Often those ducking into the supermarket for a loaf of bread will also be picking up a bottle of another other hotly debated commodity – milk.
Until 1976, milk prices were set by the Government and a subsidy was paid to producers to cover the shortfall. When that changed, milk prices doubled to the modern equivalent of about $2.26 for 2 litres.
The subsidy was completely removed in 1985 and by 1993, milk could be sold at any price. In January 1994, 2 litres was selling for the modern equivalent of $3.95.
Since then, it has generally risen in line with inflation. According to Stats NZ, the average price for a 2-litre bottle of standard milk today is $3.66, or 1 cent cheaper than in 2011.
So who sets the price we pay?
In more competitive (read: overseas) environments, it is possible for the market to decide what farmers are paid.
But given Fonterra’s dominance in New Zealand, where the co-op takes about 82 per cent of what dairy farmers produce, that would not work.
Instead, Fonterra, overseen by the Commerce Commission, has to work out the highest sustainable price it can pay its farmers and still make an adequate return.
To do that, it looks at the global dairy trade, to see what dairy commodities are trading for internationally, and “price-reference commodity products” – whole milk powder, skim milk powder, anhydrous milk fat and buttermilk powder. Then it takes off its operating costs and capital costs to determine the farm-gate price.
That means what dairy farmers – much like their red meat producing counterparts – are paid depends a lot on what international consumers are willing to pay for our products, not just what shoppers pay for a couple of litres.
Supermarkets then buy the milk either direct from Fonterra or other processors such as Synlait, or from suppliers who add value along the way.
The final price is driven by what Fonterra pays farmers, as well as the other costs of getting the milk to stores, including wages, salaries, transport, refrigeration and taxes.
According to a Consumer NZ estimate, for every $3.66 bottle of milk sold, about 34 per cent of the purchase price would go to the farmer, 54 per cent to the processor and retailer, and 12 per cent to GST.