The visible hand in economics

Thoughts on the price of milk

Posted on: November 28, 2008

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:

  1. Sharp increase in demand in Asia and the Middle east as a result of rising incomes (and dairy products are a normal good),
  2. Drought in Australia and a drop in production over the Americas,
  3. 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),
  4. Sharp rise in the price of other inputs (fertilizer and fuel),
  5. 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:

  1. What shifts are permanent?
  2. What does the long-run supply curve (and long-run demand curve) look like?

4 Responses to "Thoughts on the price of milk"

[…] 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:. More […]

[…] 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:. Original post […]

Well if you’re a believer in Peak Oil – then fuel and fertiliser costs will increase substantially in the medium to long term.

“Well if you’re a believer in Peak Oil – then fuel and fertiliser costs will increase substantially in the medium to long term.”

Very true – which would support “higher prices” and may actually benefit countries that use less fertilizer and fuel in the production process (would New Zealand fit in this?)

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