22 Feb 2011

So what happens when the freeze comes off?

1:41 pm on 22 February 2011

An agribusiness commentator says Fonterra's decision to freeze its domestic wholesale milk prices for the rest of the year raises the question of what happens when the restriction comes off.

The owners of the country's main supermarket chains, Foodstuffs and Progressive Enterprises, have agreed to follow suit and freeze their retail prices too.

But Lincoln University's professor of farm management and agribusiness, Keith Woodford, says that with payments to farmers expected to rise further this season, dairy companies and retailers will have to absorb the extra they're paying for the milk.

Professor Woodford points out that most of the cost of milk is added after it leaves the farm gate.

He says Fonterra's price freeze also raises questions about what happens when it's lifted at the end of the year - which could put more pressure on its competitors than on Fonterra itself.

That's because the freeze doesn't apply to the prices it charges the other companies it supplies milk to, and the domestic fresh milk market makes up a relatively small part of its business.