Pricing in dairy markets: who dictates and who reacts?

Background and Objective

With the withdrawal of EU agricultural policy from direct control of markets, price fluctuations at world markets can directly affect the German milk and dairy markets. This new development has consequences for the price formation in the dairy supply chain – beginning from milk producers, milk processors and retailers up to consumers. But who benefit and who loses under this new policy?

Our analysis show how price signals are transmitted from one stage to the next stage to draw conclusions about the organizational structure of the dairy value chain. This work helps to understand the market power and the exploitation.

If we understand the principles of price formation in a value chain, we can properly assess what possible consequences policy changes have. Results from this project are used to better advise the policy in the area of milk and dairy.

Approach

Long-term time series on German, European and international prices are the base of our work. In our analysis we cover the main dairy products, such as butter, cheese, skim milk and whole milk powder.

Raw milk is processed to various dairy products which do not stand alone, but are connected through complementary or substitutive relationships in different markets. These market interactions need to be captured in our comprehensive analysis which contributes to a better understanding of domestic and international markets for milk and dairy products.

Results

Our preliminary results indicate that the pricing in the German dairy supply chain has changed significantly under the reform of EU agricultural policy: The world market became more important while the influence of milk producers has decreased.