Pain for all at supermarket check-out

Monday, 17 June 2024

According to World Vision, food prices were declining globally in February, however New Zealand recorded significant increases, among other countries.

The prices on the country’s supermarket shelves may be easing, but the question on every farmer’s lips is why have their returns not reflected what has been paid for their produce?

In February, World Vision said that overall global food prices were declining, however New Zealand was one of several countries that recorded dramatic increases last year. Earlier this year, Stats NZ suggested food prices in New Zealand were finally plateauing.

That was after years of upwards pressure. At the peak, prices were up by more than 12% year-on-year. An annual food survey in 2023, run since the 1970s, recorded its biggest annual increase ever.

Even if consumers are getting a little more bang for their buck, how are farmers faring in the equation? Industry leaders say it’s complicated getting a clear picture of farmers’ cut in the supply chain.

Lincoln University professor Jacqueline Rowarth says it is not just New Zealand farmers who are confused as to why food is so expensive.

'Farmers globally cannot understand why food appears to be so expensive. They feel payouts and schedules are not covering the cost of production. The question is, where is all the money going?'

Pak ‘n Save, New World and Four Square are all owned by Foodstuffs, who says that for every dollar spent at their supermarkets, 68 cents goes to the supplier, 15 cents to wages and rates, and 13 cents to GST, leaving Foodstuffs only 4 cents of profit.

Lincoln University Professor Jacqueline Rowarth says New Zealand farmers are confused as to why food is so expensive.

“Good relationships with our suppliers have always been vital to our business and critical to improving value for customers. The returns a business can generate will vary depending on a range of factors,” a Foodstuffs spokesperson says.

South Otago cherry grower Mike Casey says while consumers are complaining about the price of food, farmers are complaining about the return they are getting.

“So we are both being squeezed by the same middle,” he says.

Casey says the majority of his cherries are exported.

South Otago cherry grower Mike Casey says consumers and farmers are getting squeezed.

“The cherries we sell in New Zealand are losing us money which is a real problem. Our fruit on the wholesale floor doesn't get a good price but customers buying them at the supermarket are paying close to export prices.”

Casey says the supermarket mark-ups mean New Zealanders pay for a substandard product.

Foodstuffs say that a key driver of supermarket prices tends to come down to supply and demand.

“Our mail order customers are getting export cherries at supermarket prices. The price isn’t going up but the quality is substantially going up.”

Weather, seasonality, transport and fuel, currency changes, labour, ingredients and equipment and global markets all impact supermarket prices, but the key driver comes down to the fundamentals of supply and demand, a Foodstuffs spokesperson says.

“A good example is the week before Christmas when strawberries cost more because everyone wants strawberries on top of their pavlova. With the demand increasing, prices go up.”

Kit Arkwright, chief executive of Beef and Lamb New Zealand Inc (B+LNZ Inc), the domestic marketing arm of B+LNZ, says the influence of the domestic red meat market on farmer returns is limited for New Zealand, due to approximately 90% of our red meat being exported.

Kit Arkwright, chief executive of Beef and Lamb New Zealand Inc, says calculating returns for sheep and beef farmers is not straightforward as 90% of our red meat is exported.

“As an exporting nation, the price of beef and lamb in New Zealand reflects what our global markets are prepared to pay. More recently we’ve seen less demand and weaker pricing, particularly for sheepmeat, from some of our key export markets, most notably China, which has unfortunately impacted returns for farmers,” Arkwright says.

Based on a range of factors including seasonality and demand, Arkwright says retailers set the price of in-store beef and lamb.

“The red meat product is one input into this equation. Some retailers also promote lamb as a loss leader to bring shoppers into stores during festive periods such as Christmas and Easter. Furthermore, there is also a vast array of red meat cuts and products.

“This all means calculating the return sheep and beef farmers receive from supermarkets is not straightforward,” Arkwright says.

Independent supermarket FIFO recently opened in Hamilton. Manager Hitesh Patel says the cost of food for New Zealand consumers is still an issue. He says prices are influenced by processing and transportation.

“The cost comes from the suppliers and manufacturers: That is where we could bring prices down.”

Rabobank senior analyst Michael Harvey says it has been a complex operating environment for the food industry. The price of milk in New Zealand is heavily influenced by the price of milk exports.

“The majority of New Zealand milk goes to export markets so it is bound by global markets. When commodity markets were at record levels it lifted the farmgate price but costs had to be passed on to consumers.

“In New Zealand, dairy consumption is quite resilient because it is more of a staple than in the luxury category but there is no doubt consumers are trading out.”

Harvey says there is a range of changes consumers will make.

“They may choose to trade down or trade out, in other words looking for cheaper alternatives. They will trade down in the meat aisle so they may buy more chicken than red meat if it is more affordable. Consumers may prepare more meals at home and eat out less.”

Aucklander Shreya Ganvir has only lived in New Zealand for eight months but already notices the price of food impacting her budget. She says she travels from the North Shore to South Auckland to get cheaper food at the weekend markets.

Ganvir is also concerned about how the cost of food is affecting her health.

“I want to eat healthy but because of the cost I end up buying less healthy food.”

Harvey says in 2022 dairy commodity prices were at record levels. The commodity market has since fallen which has brought the farmgate price down, however, there are lingering risks around global conflicts and fuel prices.

“We think we have come through the worst of it but it’s all about what happens in the next 12 months. Demand for dairy around the world is quite soft at the moment. Part of that is because China is not buying as much milk from the global market as they used to.

“We are keeping a very close eye on the market in China. It has been a volatile ride for dairy farmers in New Zealand. The cost has come back down but it’s a cautious recovery.”

Fonterra farm source group director Anne Douglas says consistent rises in global dairy commodity prices will lead to an increase in the wholesale price of products like butter and cheese.

“The price consumers in New Zealand pay for dairy products is influenced by global dairy commodity prices which fluctuate based on supply and demand dynamics and the cost of making the finished products.”

It’s good news for the vegetable market, with “incredible” growing conditions lately, president of United Fresh NZ Jerry Prendergast told RNZ. This has resulted in a decent supply, and vegetables prices dropping by an astonishing 25% as a result.

Toby Williams says over the whole supply chain everybody ends up getting more than the farmers.

Despite favourable conditions, Prendergast told RNZ that it was very tough for growers right now who weren’t making any more money despite the overhaul in supply.

“I wish I could say they did, but they're growing at below the cost of production. If you're harvesting cabbage, broccoli, cauliflower, celery, silverbeet, spinach, spring onions, lettuce, when you're producing and harvesting them like you are at the moment, for the value returns, it's actually below the cost of production.”

According to Stats NZ, fruit and vegetable prices dropped 13% in the year to March 2024.

“The annual decrease in fruit and vegetable prices was the largest recorded since the series began in 1999,” consumer prices manager James Mitchell said.

Federated Farmers meat and wool chairperson and national board member Toby Williams says supermarkets trying to keep prices down for consumers protect their own retailer margins.

“Rather than put the prices up for consumers they put pressure on suppliers. New Zealand farmers all act individually. We don’t have much say over what we get paid.”

Lecturer at Lincoln University Muhammad Umar says Covid-19 has had a long-term impact on food prices.

Inflation has increased the costs in every part of the supply chain, from fuel costs to fertiliser. This means the price of the end product will increase to match.

Lecturer in global value chains and trade at Lincoln University, Dr Muhammad Umar, says that Covid-19 has had a long-term impact on the price of food, something the New Zealand economy is still recovering from.

“The border restrictions and the way the world was halted for two to three years, really impacted all the food supply chains, mostly because New Zealand was dependent on China and there were long lockdowns over there. That really pushed the transportation prices up.”

Covid also resulted in a rise in inflation. In turn, inflation increases the costs of labour, transport, exports and production of food.

Umar suggested transport and exports as examples to explain the contribution to increased food prices. Considering fuel prices are currently high, it will cost more to transport a harvest of apples, for example, down the supply chain, and to the supermarket. The supermarket would then have to pay more for the apples which then drives the price of the product on the shelf.

Higher prices then make consumers less reluctant to spend, decreasing demand and forcing supermarkets and retailers to increase their prices to make a profit.

All of that considered, Umar says that the middle-men - transport and logistics - are usually the ones making the largest profit out of the whole supply-chain.

“Over the whole supply chain everybody ends up getting more than the farmer. This is true across fruit and vegetables too,” Williams says.

Export prices for sheep-meat are down 30% from two years ago, while on-farm input costs have increased to 20%.

As a response, Williams says more and more farmers are cutting out the middle-man and going into independent retail.

“If you look online these days you will see farmers selling meat privately, they catch that margin themselves.”

Williams says dairy and beef prices are relatively stable at the moment.

“The outlook for beef is good which comes down to the majority of non-prime beef we produce being used for burgers. The demand worldwide for grinding meat is very stable.”

Despite high input costs and low returns, Williams says sheep farmers understand the financial cycle of agriculture and that businesses have weathered the storm in the past.

It’s a different story for sheep meat however.

“Farming sheep is really hard,” he says. “We spend a lot of time making sure they are healthy, trying to keep them alive.”

Williams says earlier this year farmers were getting $6.30 a kilo for sheep meat while average export value was $9.96.

“Supermarkets would pay around $10 across the board for lamb. A more expensive cut like lamb rack would be more like $20 and they may charge around $50.”

Over the last three years, inflation has seen input costs for sheep and beef farmers increase by 35%, catching farmers in a perfect storm with weak global demand and falling profits, Arkwright says.

“This has led to a major squeeze on farm profits, which are expected to fall by over 50% this year, following a 30% fall the previous year and most sheep and beef farmers are unlikely to make a profit.”

Despite soft demand from global red meat markets, Arkwright says that this has resulted in competitively priced specials and good offers at domestic retailers, which he encourages Kiwis to take advantage of to support our farmers.

Williams says sheep farmers are wondering what the future holds but after visiting several sheep and beef farmers recently, he said the mood was better than expected.

“People understand this is temporary. The older farmers have seen what recovery looks like, the younger farmers are still energetic. There is optimism that we are going to get through this.

“It is also an opportunity for farmers to look at whether their business is producing and running efficiently. As hard as this is, there are opportunities to come out the other side. In the 1980s we saw this, good farmers looked at their businesses, focused on production and found different ways of farming. They came out the other side stronger, bigger and better.”

Williams says the best way to support farmers is to keep buying meat, especially lamb.

“Seek out independent retailers, your small butchers and small online meat retailers, those are the guys who have gone out on a limb.”

Responsible for their domestic marketing, B+LNZ has been working hard to elevate New Zealand red meat in the eyes of Kiwis. Arkwright says they’ve seen progress here, with research indicating that red meat is being consumed more often.

Umar says it is becoming more important to invest in technologies that will make production and supply chains more efficient and less costly.

“We need investment in technology to improve how we can do irrigation, how we can have better seed quality and how we can get a crop which can withstand weather and environmental related problems. All of these will help to reduce the prices in the long run.”