Analysts on the board as cheese prices gain some inflationary bite

Australian Bureau of Statistics (ABS) December quarter 2022 Consumer Price Index figures show food inflation hit a 17 year high, but there were some favourable moves in the price of fruit, vegetables and red meat.

Vegetable prices were down 10.2 per cent on the September quarter and fruit dropped by 2.9pc - but dairy lovers were the biggest losers, facing a 6.4pc jump in the cost of their favorite "cheesey comestibles".

Rabobank Dairy & Consumer Foods senior analyst Michael Harvey said the increase in the cost of cheese outpaced that of milk.

"This is not surprising, as the price of milk started to rise first and other dairy categories play catch-up," Mr Harvey said.

"When looking at annual changes for the December quarter - cheese is now 14pc higher - the highest rate since 2008.

"The main driver is still the same thing - that dairy companies are passing through the substantial increase farmgate milk prices."

Read more:

The CPI rose 1.9pc in the December quarter, hitting 7.8pc annually, according to the latest data from the Australian Bureau of Statistics (ABS).

ABS head of prices statistics Michelle Marquardt said the most significant contributors to the rise in the December quarter were domestic holiday travel and accommodation (+13.3pc), electricity (+8.6pc), and International holiday travel and accommodation (+7.6pc).

Food prices continued to rise, driven by meals out and takeaway foods (+2.1pc) as dining establishments passed through rising costs for inputs including ingredients and labour.

Freshagenda director Steve Spencer said high commodity prices lifted the cost of milk in the 2022-23 season, which were passed on to consumers.

'It's that simple," Mr Spencer said.

"Will the consumer continue to wear those?

"So far yes, but when spending slows (as all economists expect) retailers may be tempted to drop prices to keep foot traffic."

He said the difference now was that one major retailer was sourcing milk for cheese and fresh products directly and paying the full cost.

In its Global Dairy Directions January report, Freshagenda said milk production continued to fall.

In the past four years, the sector had shed 1 billion litres of milk, with more than a third from northern Victoria and almost a quarter from western Victoria and SA.

Next season, national milk production was likely to be back below 8b litres, less than the output for the 1993/94 season.

"With reducing milk supply, the product mix has, and will continue to, sustain packaged milk and cheese output, leaving less for milk powders and butter," the report said.

"Milk use will continue to prioritise higher value domestic markets - milk, cheese, cream, dairy foods and specialised ingredients."

The report found if retail prices remained steady, processors should be able to afford farmgate milk prices.

"But, in the short term, retailers will be sensitive to competition for foot traffic, as consumers become more frugal in response to broad-based cost-of-living increase."

So far the milk producer had been the winner "as many milk buyers with ample capacity bid to keep their milk intakes and market commitments intact.

"With milk in short supply, "import-parity" pricing has created a value-transfer from consumer to producer, with small gains for some but not all processors," the report said.

"Consumers are now paying more sustainable prices for fresh milk products, while cheese prices reflect a higher regard by retailers for security of supply."

Retailers would continue to use the world market as a benchmark.

"The history of cheese pricing shows the domestic market offers some stability," the report said.

"However NZ export benchmarks remain influential over time, while we currently see wide divergences over world prices for domestic cheese and butterfat with the quick fall in global markets."

A spokesperson for the Australian Dairy Products Federation, said it was too early to assess the consumer response to elevated prices.

"It is clear that consumers regard dairy as an important dietary staple," the spokesperson said.

"As is the case with most sectors in the Australian economy, current high levels of inflation are impacting the cost of dairy products with evidence that Australians are adapting to living in these challenging times.

"Encouragingly, we can see that roughly the same number, if not more households across the country, continue to purchase dairy regularly."

Shoppers were adapting to cooking at home more, buying the best deals on the shelf - specials - and private label products, but the domestic market for dairy continued to perform.

The December Milk Value Portal Quarterly Insights Report also reported the Australian market was no longer valuing milk in line with Oceania fundamentals, due to a steep decline and shortage in local production

Major retailer pricing and sourcing practices for cheese had also effectively placed a floor on local wholesale cheese and butterfat prices, well above NZ prices.

"Whether local prices can be maintained above international benchmarks will be critical for Australian dairy manufacturers who are also competing for a dwindling pool of milk," the quarterly insights report found.

"Processors are under pressure to limit farmgate price reductions for 2023/24 while continuing to face labour issues and elevated energy, transport and packaging costs."

Subscribers have access to download our free app today from the App Store or Google Play.