Who is to blame for soaring butter prices?

Thursday, 5 June 2025

EXPLAINER: As consumers face rising grocery bills, butter has become a symbol of a broader problem: a country built on dairy exports finding its own products increasingly unaffordable.

The reasons aren’t simple. Butter pricing reflects a complex mix of market dynamics and policy settings, not the actions of any one player. Responsibility is shared, and the problem isn’t easy to fix.

So, who is to blame for butter now costing around $11 a block, and will we ever see prices drop again?

Exports first, consumers second

At the heart of the matter is how New Zealand’s dairy sector is structured, and why that means local consumers are often at the mercy of global markets.

New Zealand produces far more dairy than it consumes. Around 95% of the country’s milk and dairy products, including butter, are exported. That export dominance determines how domestic prices are set.

Economist Shamubeel Eaqub explains: “The reason we make lots and lots of milk in New Zealand is because we export it. And so because that's our major market… that tends to be the price system.”

“We’re just bloody good at making milk,” he says, “which means we’ve built an industry around exports.”

This model is called export parity pricing. It means the price Kiwis pay for butter reflects what it could earn overseas, rather than the local cost of production.

And when global prices rise, domestic prices typically follow.

What about farmers and Fonterra?

It’s definitely not farmers, they just sell the milk to dairy-cooperatives such as Fonterra.

Fonterra’s job is to return profits to farmer-shareholders. That means chasing the best possible price, often through exports.

“Would you really sell something for less than you could get somewhere else? I mean, no business would do that,” Eaqub says. “It’s kind of understandable… most of our dairy products are exported. It’s not surprising that it is export price-led.”

Although Fonterra does supply the domestic market, there’s no obligation to do so at a discount. When export contracts offer better margins, that’s where the focus naturally shifts.

So it must be the supermarkets then?

Retailers do play a small role. According to Eaqub, the gap between export prices and what shoppers pay at the supermarket typically includes about $1 in margin to cover transport, storage, and profit.

During Covid, that gap narrowed as supermarkets discounted butter to attract shoppers, sometimes using it as a loss leader (or a “less of a profit maker”, as Eaqub calls it).

But now, as global prices climb, the spread has widened again.

“Those future higher prices will also be passed on to wholesale costs… and supermarkets will pass those on fairly quickly,” he said.

More competition could help reduce prices but the margins are so small the savings would be minor.

However, this does help in Australia where Coles, Woolworths and Aldi compete aggressively on price.

In New Zealand, Woolworths charges $8.49 for 500g of its own-brand butter, compared to A$7 (around NZ$7.50) for the same product in Australia.

What can the Government do?

While the Government creates the structure and environment in which the dairy industry operates, there’s little it can do.

New Zealand does not subsidise dairy for consumers, nor does it exempt food from GST.

Eaqub said while many countries remove tax from essential goods, New Zealand has opted for consistency across the tax system.

“There’s been a lot of resistance to changing that… the argument has always been, instead of removing GST on food for everyone, we keep collecting it and give more welfare to people who need it.”

Structural changes, such as reducing the export focus or subsidising dairy for locals, would have serious economic trade-offs.

“If you reduce the prices on dairy products, then our farmers make less money, which then impacts the economy,” Eaqub said. “So the Government won’t make those big structural changes.”

Is butter now a luxury?

With fewer New Zealanders buying butter regularly, the answer may already be yes.

“The share of New Zealanders that are buying butter regularly has already been falling quite a lot,” Eaqub says.

“Part of the reason is changing preferences, but also because it has become more expensive… a lot of people are being priced out.”

The trend is clear in the 2023 Household Economic Survey, which found only 16% of households bought butter during the survey week. That figure has been declining for years, down from 30% a decade ago, and more than 80% in the 1980s.

What will happen next?

There may be some short-term relief. Global dairy prices have started to ease slightly, with the Global Dairy Trade auction showing contract prices for butter slipping from their April peak of US$7874 ($13,067) per tonne to US$7465 for November.

“There could be some relief coming, absolutely… but you can see that it's much further out,” Eaqub says.

“It usually takes two to three months for that to flow through to retail prices.”

In the meantime, butter prices are likely to remain elevated through winter and early spring.

The takeaway

High butter prices in New Zealand are the outcome of a market that prioritises exports, rewards scale, and leaves little room for consumer protection.

No single player is solely to blame, but fixing it would require systemic reform, political will, and a rethink of who dairy production is really for.

Until then, New Zealanders will continue to pay world-class prices for their home-grown butter.