Milk prices have plummeted over the past year but the dramatic decreases have not been passed on to consumers.
In a report published this week, the EU Commission said consumer prices of dairy products have fallen some 2 per cent since the end of 2007, while commodity milk prices have dropped 31 per cent and butter prices have declined 39 per cent.
The Commission report concluded that the “EU dairy supply chain does not function efficiently.”
The stability of consumer prices hinders the recovery of the dairy sector by preventing demand from increasing, and pushing producer prices back up.
Furthermore, the gulf between producer and consumer prices is resulting in a distribution of gains from production that was questioned by the Commission.
“This situation also raises serious concerns regarding the distribution of value-added in the chain between farmers, milk processing factories, the dairy industry and retailers,” stated the report.
Milk producer prices are now so low that many farmers are finding it difficult to cover production costs, according to the European Milk Board, which represents EU farmers.
Meanwhile, dairy product manufacturers farther up the supply chain are showing robust financial results.
Just after the EU Commission report was published, the dairy supply chain in the UK came under close scrutiny as more evidence came to light in a long-running price-fixing case.
The Office of Fair Trading (OFT) accused large supermarkets and diary processors of price-fixing in 2007, alleging that the collusion had cost consumers £270 million.
Tesco and Morrisons both denied involvement in price fixing and restated that view after OFT released a statement yesterday saying it had uncovered more evidence against the supermarkets.