Thoughts on the price of milk
Posted November 28, 2008on:
This is from an email exchange between Agnitio and myself on why dairy prices rose, following his post on Fonterra’s auctions:
A few reasons:
- Sharp increase in demand in Asia and the Middle east as a result of rising incomes (and dairy products are a normal good),
- Drought in Australia and a drop in production over the Americas,
- Increase in the price of feed stemming from biofuel’s sucking up grain (good for NZ as we grass feed cattle – increasing our comparative advantage),
- Sharp rise in the price of other inputs (fertilizer and fuel),
- Sharp increase in shipping costs.
All these things combined to see dairy prices increase 200% odd in a couple of years 🙂
Note, all these factors have decreased somewhat, which is why spot prices have fallen like 50% over the past year. To figure out where prices will settle we need to ask two questions:
- What shifts are permanent?
- What does the long-run supply curve (and long-run demand curve) look like?