New analysis shows German milk producer burden

The German system of tendering obligation, purchase guarantee and subsequently fixed milk prices, in some cases well below the milk production costs, is still common practice and burdens the milk producers massively, according to the German milk farmer organisation MEG Milch Board, which has completed a new analysis of the topic.

The MEG Milch Board commissioned an independent consulting company, Lademann & Associates, to examine the effects of the existing delivery conditions on the competition in the German milk market and to examine possible ways of intervening.

The competition-economic analysis of the effects of the present formation of the milk price has four central results:

  1. Full tendering accompanied by a guarantee of acceptance, which is still dominant for a large part of the volume of raw milk produced, leads to market closure and encourages overproduction and low prices.
  2. As a model, it can be shown that the current market structure, which enables dairies to purchase and, if possible, process and sell the raw milk supplied, without taking full account of producer costs, puts the producers at a much lower level than if producers and dairies negotiate prices before the dairy is supplied.
  3. The unilateral retrospective pricing of dairies will shift market risks to producers. Producers are, however, in the inherently poorer position of lacking key market information on quantity planning, with the result that regular quantities of milk are flooding the market, with the result that there are large price fluctuations in the market for raw milk.
  4. From an economic point of view, the relationship between co-operative dairies and milk producers can be understood as the principal-agent problem: (Co-operative) dairies, the agents, pursue their own interests and do not act in the interests of co-operative members, the principals. At the same time, producers are also pursuing different interests, which can only be reconciled with each other through regulation that is valid for all actors.

The existing market and supply structure to the detriment of the producers can be overcome by a binding determination of the contract content in terms of prices and quantities, the analysis says. Binding prices and volumes for all market participants should be implemented to stabilise the milk market, according to the MEG Milch Board, which will inform the German federal and state ministers responsible for agriculture about the results of the study.

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