Dairy prices

Farmers Froth Over Milk Prices

  • Why it matters

    Why it matters

    Market pressures have forced down the price of german milk, and the departure of increasing numbers of its suppliers has left DMK in a very precarious position.

  • Facts

    Facts

    • As a cooperative, DMK belongs to its 8,300 milk-producing members, taking all their milk and marketing it.
    • DMK has some 7,500 employees and €4.6 billion ($5 billion) in revenues.
    • DMK offers about 20 euro cents for a liter of milk; rivals such as Theo Müller, Arla Foods and FrieslandCampina pay more than 24 cents.
  • Audio

    Audio

  • Pdf
Milchbauer in Hennef
German herds are being milked for everything they're worth. Source: Oliver Berg/DPA

At the headquarters of Germany’s largest dairy group, one looks in vain for lush meadows, quaint cowsheds or idyllic farms.

Deutsches Milchkontor, or DMK for short, is located amid parking lots and office buildings with a view of the runway at Bremen Airport.

In a way the site shows how far DMK has distanced itself from its owners — namely the farmers who supply the cooperative.

In fact, the new chief of DMK, Ingo Müller, is confronted with a revolt. Recently angry farmers blockaded a DMK dairy, while others gathered signatures to force a fundamental change of course over prices.

Mr. Müller, a 44-year-old dairy engineer, has only headed DMK since early October. He has announced countermeasures, but it’s not clear whether he will be able to persuade the farmers.

“We’re all still on our feet but knocked out. Unless something changes soon in the price of milk, many will have to shut down operations.”

Ottmar Ilchmann, AbL farm cooperative association

The cooperative is losing members: If the suppliers currently threatening to leave do so, DMK will lose 9 percent of its milk volume. And there is the threat of more withdrawals at the end of the year.

There is a simple reason for the exodus from DMK: The dairy pays less than the competition. For example, the company offers about 20 euro cents ($0.22) for a liter of raw milk, while rivals such as Theo Müller, Arla Foods and FrieslandCampina pay more than 24 cents.

The substantial difference comes at a sensitive time. The price of milk is already at very low levels: Too much was produced in past years, even as demand from countries like Russia and China remained below forecasts.

What is more, in parts of Northern Germany’s diary heartlands, farmers have few alternatives to milk production.

DMK arose out of mergers of local dairies in the region – most recently, Nordmilch and Humana in 2011. Those farmers have to live with DMK, or go under because of its lower prices.

“I intend to fight for every farmer,” Mr. Müller told Handelsblatt. He hopes to regain trust in a series of nine meetings with members.

He also promises to restructure the company. A new organization divided according to commercial areas — such as brand products, private labels and exports — would replace the old structure based on functions.

Mr. Müller hopes in this way to catch up with international competitors, such as Denmark’s Arla or Dutch cooperative FrieslandCampina — in both cost and market success.

Moreover, 250 jobs are being eliminated in a measure that should boost the milk price in the medium term. Currently, DMK has some 7,500 employees and €4.6 billion in revenues.

As a cooperative, DMK works under special conditions. The large dairy belongs to its 8,300 farmers. It has to take all the milk they produce and then market it. The revenues are returned to members through the price it pays them.

At Arla Foods and FrieslandCampina, both of which also have members in Germany, this procedure works well — possibly because they subsidize German milk prices with profits from neighboring countries.

For its part, after the merger in 2011, DMK invested a half-million euros in new plants to achieve an economy of scale. But the construction of a milk-powder tower took longer and cost significantly more than planned at €100 million. That helped push down the price DMK could pay for milk.

And there is another problem: DMK markets many standard products such as fresh milk and milk powder that have especially suffered from the decline in prices. Some private dairies in southern Germany, such as Bavarian-based Müller-Milch, are managing significantly better with their strong brands – and can pay farmers more.

So Mr. Müller wants to strengthen DMK’s brands – Milram within Germany, Oldenburger for export. He said that new, stronger-tasting varieties of cheese are conceivable – as is more advertising. And he hopes that the new structure will make such initiatives more effective.

Critics are not persuaded. After a failed attempt last spring to implement more radical changes through a special cooperative meeting of elected representatives, opponents are now collecting signatures calling for a general meeting of all members.

“Two-thirds of the problems are self-created,” complained one of the active members. “Anyone who was young, seemed dynamic and had a doctorate could get hired at DMK. It’s high time for job reductions.”

The member, who didn’t want his name used, accuses DMK of having invested in concrete instead of the brand – and of now having high fixed spending costs.

What is more, critics are outraged that DMK sells its products at too low a price to retailers such as grocery discounter Aldi. “DMK often presses ahead with bad deals – most recently last spring,” said Ottmar Ilchmann, of the AbL farm cooperative association.

His group organized the blockade at a DMK dairy in August. He said the group ruins the market price because other dairies have to go along with it.

“At the time of the merger, DMK promised farmers market power through size. Now it has to finally begin bringing that pressure to bear,” he said.

“We’re all still on our feet but knocked out. Unless something changes soon in the price of milk, many will have to shut down operations.”

Mr. Müller rejected the accusation of making bad deals with retailers. He said the company recently even lost contracts to competitors after being outbid.

Negotiations are currently underway with retailers for the next half-year. At the same time, Mr. Müller wants to strengthen exports. And instead of mainly passing products such as milk powder on for further processing, he wants to deliver DMK’s own brands to supermarket shelves.

For example, that is proving increasingly possible in China with the Oldenburger brand. Mr. Müller also hopes for a pickup in the Russian market, where DMK is cooperating with a local producer.

But he can’t promise farmers a rapid improvement. “I won’t say that in one to two years we will be able to pay the same milk prices as others,” he said. “But what we are doing will enable us to approach the competition.”

He believes it was right for DMK to strive to become a big player in Northern Germany. “A certain size is necessary in order to develop the international market in farmers’ favor,” he said.

But building up this healthy company is first costing cooperative members money. So Mr. Müller said he doesn’t intend to seek further mergers.

Instead DMK could shrink: If more farmers jump ship, plants would have to be closed. That would allow DMK to downsize unprofitable areas.

The long period of notice for cooperative farmers plays into Mr. Müller’s hands. Whoever gives notice at year’s end can only leave the dairy two years later. So time remains for the head of DMK to convince dissatisfied members to rethink their decision.

But this could come to an end: The German Antitrust Agency is currently examining whether competition among dairies for raw milk could be strengthened. The monitors suspect that the long cancellation periods, and the obligation to deliver all their milk to a single dairy, are disadvantages for farmers.

Against such a background, Mr. Müller hopes to use his goodwill tour to persuade members that he has his feet on the ground.

“We have to win back the trust of the farmers that, as their employees, we’re doing a good job,” he said.

 

Christoph Kapalschinski covers consumer goods, textiles and food for Handelsblatt. To contact the author: kapalschinski@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!