Explained: Why butter costs so much
Friday, 25 July 2025
We produce so much dairy yet so many Kiwis can’t afford to buy it. Why? And should there be a better way to ensure staple dairy products are affordable for New Zealanders? Explainer Editor Lloyd Burr delves into the complex world of global dairy prices.
I doubt the word “butter” has been used by politicians as much as it has been this week. (Maybe in 1973 when the UK joined the EEA and nearly killed our dairy industry.)
In just one press conference on Wednesday, Finance Minister Nicola Willis used it 18 times.
The reason she’s been talking about it and why butter’s the topic du jour is its skyrocketing price, with Kiwis having to fork out nearly $10 for the cheapest block.
Willis has vowed to get to the bottom of why it’s so expensive here compared to Australia, the UK, or America. She even met with the boss of Fonterra.
Her verdict: While the global market sets the price, it’s the lack of serious supermarket competition here that’s primarily to blame.
So how does it work? How are the prices set? Why isn’t there a special domestic price? And why is there a massive demand for butter all of a sudden? Here’s a general breakdown.
Introducing ‘Global Dairy Trade’
Dairy products are sold and purchased in bulk at numerous auctions around the world, including one in Chicago, another in Europe, and an online platform called Nui.
But the biggest of them is the Global Dairy Trade (GDT), owned equally by Fonterra, the NZX, and the European Energy Exchange (EEX).
There are 10 global dairy giants that sell bulk dairy products like milk fats, cheeses, milk powders and butter on the GDT.
The number of buyers fluctuates but there are hundreds. They buy the bulk products and sell them on to other buyers in their markets. China’s the biggest market, followed by Southeast Asia, Oceania, and the Middle East.
How are global dairy prices set?
Every two weeks, the GDT has an auction where the prices of eight dairy products are set.
The 10 sellers tell the GDT how much product they have, it’s totalled, and that’s the supply level. This level stays the same throughout the auction, with demand dictating the price.
The demand is the total of the products that all the buyers have submitted.
The auction is done in rounds and when it begins, the starting prices are set at 15% below the previous auction’s price.
In the first round, if demand outstrips supply, the price will increase and move to the next round.
The higher price will see buyers lower their demand and if it’s still higher than supply, the auction moves to another round with an even higher price.
This cycle continues until the sum of the buyers’ demand matches the supply level, determining the GDT prices, which are posted fortnightly.
Why are prices so high now?
Because there’s much higher demand for dairy products at the GDT than the sellers can supply.
The reason for the high demand? Stu Davison, a dairy analyst at US-based Highground Dairy, says there’s a perfect storm of demand at the moment.
“Basically everywhere, the fat at the moment is healthy fat. So butter is top of the rank and it's leading a lot of influence into China, called the Western diet influence,” he says.
That’s on top of a growing middle class in China with more disposable income to spend on items like butter, especially grass-fed butter from New Zealand.
China’s also seeing a surge in demand for cream. Since cream is used to make butter, that helps drive up the price of butter too.
“You've also got Saudi Arabia and the Middle East - they're also eating more butter as their incomes increase,” Davison says.
Why is non-Fonterra butter still expensive
Fonterra is the only New Zealand company that sells into the GDT, so why are other local dairy producers, like Westland Milk, Synlait, Open Country and Oceania, bound by the GDT price?
Lewis Hoggard from the NZX dairy insights team says it’s mainly because of Fonterra’s dominance and an expectation from non-Fonterra farmers to get at least what Fonterra farmers get.
“Given Fonterra has around a 78% market share, it dictates what the smaller companies can do,” he says. “The GDT prices are looked at by everyone, and it's generally the lowest common denominator because it's supposed to be as efficient as possible for buyers to procure products.
“In order to keep farmers happy, a lot of other [non-Fonterra] processors will just attach their farm gate milk price to Fonterra’s. They'll say, ‘We're going to pay you exactly what Fonterra pays,’ plus a certain premium in some instances,” Hoggard says.
Can’t there be special rules for New Zealand consumers?
The farms are here, the cows are here, the milk is grown here, the products are made here, so shouldn’t those who live here benefit? Doesn’t Fonterra have a goodwill obligation to the country it profits from?
Those sentiments lie at the crux of the whole argument over how much dairy products cost on our supermarket shelves. The answers though, probably won’t help.
“It would be better for Fonterra if they didn’t have to deal with the New Zealand market and just exported everything,” Davison says frankly.
“The reality of New Zealand's system is that it makes more financial sense for Fonterra to sell it internationally,” with New Zealand making up only around 5% of its sales.
“But Fonterra has a duty, stumps up and actually delivers to the local market too, even though it’s a headache,” he says.
That’s because New Zealand is an anomaly in the world of dairy: not a domestic-driven market. Most other dairy producers are driven by domestic demand rather than overseas demand.
What about a special domestic price for dairy in New Zealand? Consumer NZ’s CEO Jon Duffy says that’s unlikely given various free trade deals.
“We could end up at the World Trade Organisation,” Duffy warns. “It would effectively be a subsidy for domestic products which, if you look at it another way, is a tariff on exports.
“We would be charging a higher price for the same product to countries we have free trade agreements with and I would imagine many of those free trade agreements would prohibit that.”
Hoggard says while a domestic carve-out could be possible by passing legislation, it’s probably not feasible.
“It gets very political at that point and it's a very interventionist type of mentality. It would obviously be tremendously unpopular with farmers, and people in the agri sector,” he says.
Farmers benefit, but does the rest of the country?
With dairy prices at such a high level, it’s great for farmers because they get bigger payouts. But what about everyone else?
“The theory goes that there's generally more foreign currency flowing through the economy because we're selling milk offshore, farmers will take the profits they're making from selling dairy at a higher price, and spend that in the New Zealand economy,” Duffy says.
That money will be spent in local towns and with local businesses which is good for the economy. Farmers might hire an extra employee, build a new barn, or upgrade the milk shed - all of which benefits the economy.
“But there’s a flipside,” says Duffy. “We have quite an internationalised economy. So if farmers are paying down debt, they're paying money back to an Australian-owned bank. If they're buying new tractors which are manufactured offshore, ultimately that money is heading out of the economy back to where those products are made.
“So there are a few fish hooks in the general premise that if farmers are doing well, the economy is doing well.”
Why do Kiwis care so much about dairy prices?
Part nostalgia, part patriotism, part home economics.
“It does hold a place in people's hearts,” Duffy says. “It's central to a lot of traditional cooking that we do in New Zealand, be that European cuisine or many other ethnic cuisines - butter is a central part of it.
“Not being able to get your hands on a staple because it's been priced out of your reach, quite rightly, people find that outrageous. Ten bucks for a block of butter is bananas.
“People are also not comfortable that butter is moving it out of staple territory. It's becoming a luxury,” Duffy adds.