Getting Milked: Surging Dairy Prices Cheer Some Farmers, Sour Consumers

Globalization is shaking up Europe’s once sheltered dairy markets, causing milk prices to surge amid rising demand. Many dairy farmers are profiting, but not all, as the European Union hesitates to push through further agricultural reforms.

China is getting mighty thirsty for dairy products, as is the rest of the world. The global demand for milk alone is growing by up to three percent a year.
DPA

China is getting mighty thirsty for dairy products, as is the rest of the world. The global demand for milk alone is growing by up to three percent a year.

Each year, buyers from Germany’s largest food retailers come together to negotiate new milk contracts with the country’s main dairy producers. Meeting at the headquarters of big supermarket chains including Aldi, Lidl, and Edeka, the retailers have often had the upper hand while dealing with the dairy farmers.

Both sides know and respect each other, but the retailers have had little trouble pushing down milk prices in past. Over the last five years they’ve dropped almost 15 percent amid a huge oversupply, leaving the farmers little choice but to offer it at a discount.

And that’s how it was for years -- until the two sides sat down at the negotiating table this spring. Suddenly, the balance of power had changed. Germany’s large dairy producers -- Nordmilch, Campina, Müller, and others -- presented a united and confident front as they demanded seven to ten cents more per liter of milk starting in July. And, to the surprise of many, the big retailers meekly acquiesced.

For the first time, dairy farmers could threaten to sell their products elsewhere since the global dairy market is suddenly thirsty for German milk. And there’s particular interest in powered whey. Prices for the yellowy stuff, which is the foundation for many packaged food products, have more than doubled within a year. Globalization has finally reached a sector that for a long time was organized regionally. While the dairy sector in Germany is still connected with the image of the quaint Bavarian farmer and his bell-wearing cows, in reality it’s become an industry of multinational corporations, stock prices and commodities markets.

Milk is in demand. The inventories of food producers have dried up. So too has Europe’s proverbial sea of surplus milk. The much-maligned mountain of extra butter is also gone. Such positive developments have even encouraged the European Commission to consider reforming Europe’s bloated agricultural policies further.

EU Agriculture Commissioner Mariann Fischer Boel wants to increase the bloc’s milk quotas, which have been frozen in place for years. The intention is to push along the decision made by EU agriculture ministers to do away with the convoluted quota system that regulates Europe’s milk production. But the quotas will only be completely eliminated in 2015. While that might not seem very ambitious, at least the basic laws of supply and demand have been reestablished for the first time since the regulations for the milk market were implemented in 1968.

Frank Jäger, the manager of the dairy association from the German state of Hesse, is amazed by all the changes: “Market forces are prevailing.” But what makes dairy farmers happy doesn’t necessarily please consumers. Prices for milk and other dairy products have skyrocketed lately in Germany. Cream, cheese, curd, butter and ice cream have suddenly become up to 50 percent more expensive. Quick condemnation has come from across the political spectrum: Conservative German Agriculture Minister Horst Seehofer has called such increases “unjustified” and Social Democratic parliamentarian Ulrich Kelber accused producers of “massive exaggeration.” The chairwoman of the German parliament’s agriculture committee, Ulrike Höfken of the Green Party, urged consumers not to put up with being “ripped off.”

At the same time, prices for other foodstuffs are also on the rise. Bread, meat, beer -- globalization is making it all more expensive. But it’s the higher cost of a wholesome glass of milk -- with its almost mythical qualities as the bedrock of nutrition for families -- that has really struck a nerve. Many people consider it almost a constitutional right that children have access to an affordable glass of milk. “Milk isn’t a luxury good and it cannot be allowed to become one either,” says another Green parliamentarian, Thea Dückert. She even believes Germany’s unemployment benefits should rise to compensate for the higher prices.

Behind all the commotion in Germany, a realization is slowly sinking in around the world that there's a growing competition for foodstuffs -- the sort of thing that used to start wars. Milk futures on the Chicago Mercantile Exchange have risen around 70 percent over the past 12 months. Hong Kong-based China Mengniu Dairy Company is selling more milk than ever before. Even milk producers in smaller countries such as Greece are riding a wave of rising profits. The share price of Greek dairy company Kri-Kri has surged 120 percent this year alone.

Almost all foodstuffs traded on the commodities markets have become more expensive recently: wheat, coffee, cocoa. And speculators are betting that the trend will continue. The prices for fertilizers, seeds and pesticides are rising too. Spot prices for agricultural items are on average 40 percent higher than in early 2006. It’s a totally new experience for many.

German milk producers have raised prices on milk and milk products nationwide by as much as 50 percent.
Getty Images

German milk producers have raised prices on milk and milk products nationwide by as much as 50 percent.

For decades, food in the industrialized world has generally become cheaper, thanks in part to low-cost feed from poorer developing countries. But the situation appears to have reached a watershed -- even if reports of German shoppers hoarding milk and butter are as absurd as the scaremongering by the country’s tabloid press. Consumers in Europe’s largest country can still afford to feed themselves for relatively little compared to days of yore.

A typical German family spends around 12 percent of its income for food today, whereas 50 years ago it was 50 percent. Back then, even butter was too expensive for many families. So-called “school milk” continued to be subsidized into the 1970s so working-class kids could drink it. These days milk and yoghurt have become cheap products, as have pork and chicken. Germans even have it better than many of their EU neighbors. According to a retail trade association, German prices are roughly 15 percent lower than the average of all the older Western European EU members.

“In Germany we have the most expensive kitchens, but the cheapest food,” says Josef Jacobi, the head of the Upländer dairy, in an attempt to soothe his customers. But for how much longer will things remain affordable? “Consumers will have to get used to more expensive food,” says Gerd Sonnleitner, president of the German Farmers Association.

The price of bread is on the rise, meat is more expensive, even margarine costs 20 percent more than last year. The worldwide demand for food -- and better quality food at that -- is growing. In particular, the desire of 1.3 billion Chinese for dairy products is exploding. Supermarkets in Beijing and Shanghai are constantly expanding their refrigerated sections for milk, butter, cheese and yoghurt.

Last year the Chinese ate on average 20 kilograms of dairy products. That’s not much compared to the Germans, but double the amount they consumed in 2000. Chinese soccer players swear dairy is great for staying in shape and women believe it might be a new beauty elixir. Then there’s the widespread rumor that kids will grow up to be as big as Europeans if they drink enough milk.

The country’s domestic production can no longer keep up with the populace’s growing appetite for dairy. Although the number of dairy farms has doubled within the past five years -- making China the third-largest producer after India and the United States -- imports last year surged at a double-digit rate. China's traditional dairy supplier, Australia, has exported less and less following years of drought, forcing the Chinese to look as far as Europe for their dairy needs.

That’s partly why the global demand for milk is growing 2.5 to 3 percent each year. Overall production, however, is only rising 1 percent annually. Suddenly the price on world markets is higher than EU production prices.

But there’s another reason for more expensive foodstuffs: amid growing concerns about climate change, the use of biofuels to help combat global warming is increasing. Farmers are planting more corn and rapeseed instead of food crops. Increasing floods and droughts have also decimated harvests in recent years. Taken all together, it's led to a situation of growing demand and shrinking supply -- causing prices to climb higher in the process.

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