Germany looks to change milk supply relationships
In the report, the government authority presents results of its investigations to date, and offers initial proposals for alternative and more pro-competitive means of structuring supply relations between milk producers and dairies.
Interested stakeholders in the sector now have the opportunity to offer comments.
Notice period too long
Andreas Mundt, president of the Bundeskartellamt, said its investigations showed contracts between milk producers and dairies in Germany have long periods of notice and duration.
In addition, farmers in Germany are generally obliged to supply the milk they produce exclusively to their respective dairy, with virtually no possibility for them to switch to another dairy.
“This is a problem for farmers and hinders possible newcomers on the dairy side or dairies wishing to extend their activities,” Mundt said.
“Another widespread practice is that the price of raw milk is set only after delivery and is based on reference prices and market information systems. We now want to intensify discussions with the sector about possible pro-competitive alternatives."
Since April 2016, the Bundeskartellamt has conducted a proceeding on conditions for the supply of conventionally produced raw milk. In particular, the combination of contract duration and exclusive supply obligation, ex-post pricing and certain market information systems are considered problematic.
Two years notice needed
The Bundeskartellamt questioned 89 private and co-operative dairies, which in 2015 procured approx. 30.9m tonnes of raw milk. This is equivalent to around 98% of the total milk supply volume.
The authority's investigations showed that in 2015, 97.8% of the volume of raw milk covered by the investigations was sold subject to exclusive supply obligations. In addition, contracts for more than half of the raw milk supply volume can only be terminated with at least two years' notice.
The actual period of notice can be considerably longer because contracts for 87.5% of the total milk supply volume can only be terminated once a year. All these factors cause a stagnation in market activity, as expressed by a low switching rate. For example, the switching rate in 2015 only accounted for 1.0% of the total raw milk volume.
Proposed alternatives
In the report, the Bundeskartellamt offers proposals for alternative ways to structure supply relationships, e.g. short periods of notice, loosening the link between supply relationship and cooperative membership, setting prices before delivery and agreeing set supply volumes.
In 2016, Bundeskartellamt initiated an administrative proceeding to examine the conditions dairies have set farmers for the supply of raw milk. In a test case, it is examining the conditions of supply set by the large north German dairy DMK (Deutsches Milchkontor GmbH) and its parent company, Deutsches Milchkontor eG.
However, it can be extended to cover other dairies as well should they be deemed necessary.
