A wall of long-life, shelf-stable milk looms over Jia Jiangping. The head of purchasing at Jenny Lou’s, a Chinese supermarket chain, lovingly runs his hand along the pallets of blue and white cartoons, pointing out some German brand names; Rheinburg, Oldenburger, Weidendorf.
“In just a short time, German milk has become one of our most important product groups,” said Mr. Jia. He notes that the customer is buying a feeling of security with the imported milk, known in Europe as UHT after the ultra-high temperature process used to pasteurize it. “Anyone who can afford it prefers products with the German colors on it.”
European cows produce much more milk than is consumed in the regional market. The major dairies sell the excess all over the world, usually in the more durable form of powdered milk or cheese.
Much of the European dairy industry is organized into co-operatives, with the Deutsche Milchkontor (DMK) being the largest in Germany. Traditionally, the co-ops buy every drop of milk from dairy farmers, and then look for markets in which to sell it. This means that it isn’t the major supermarkets in Germany, such as Aldi or Rewe, that determine the prices but rather international markets.
In just a short time, German milk has become one of our most important product groups. Jia Jiangping, Jenny Lou’s supermarket chain
The German Farmers’ Association knows this only too well, and has benefited from it. The price of milk rose to record levels at the start of the year following a slump in 2009. But in the past few months the price has begun to slide again.
There are several reasons for this. One is that high prices enticed farmers in the major production regions of Europe, North America and New Zealand to produce more milk. Cows are being slaughtered later and more feed is being used.
Another reason is that co-operatives, strengthened by mergers such as the one that produced the Dutch giant Friesland-Campina, have developed global markets. For example, they are partnering with farmers in Nigeria and Vietnam.
As a result, the export market has become increasingly important. Earlier this year, China was on course to double German milk imports to 400,000 tonnes, making it an attractive supplemental business for German dairy farmers, said Daniela Bartscher-Herold, a partner in the Munich consulting firm EAC.
The Chinese are so thrilled with European quality that they even pay a juicy premium. A package of UHT milk costs between €1.70 ($2.12) and €3 ($3.74) in Beijing. Transport makes just a few cents difference to the German price. The rest is margin – for middlemen and for supermarkets such as Jenny Lou’s, but also for suppliers in Germany.
To cash in, Chinese dealers stocked up with milk powder from Europe. In the first months of 2014 they bought as much as in the whole previous year. But they overestimated the market.
Warehouses are now chock-full of stock and dealers are hanging back on new orders in Europe. “The China boom from the start of the year is over for the moment,” said Björn Börgermann from the German Dairy Industry Association.
Warehouses are now chock-full of stock and dealers are hanging back on new orders in Europe.
A Russian ban on the importation of some E.U. products, including milk ones, is not helping European dairies. They have been unable to sell more than 200 million kilograms (441 million lbs) of cheese to Russia, the equivalent of two billion liters (53 billion U.S. gal.) of raw milk.
Oversupply plus plunging demand equals a drop in the price of milk.
During the last milk price crisis in 2009, dairy farmers sounded a noisy alarm. Back then the price per liter was barely €0.20. It is still only €0.33, but that hasn’t stop the German Dairy Farmers Association (BDM) from sounding off about the cheap prices offered at Aldi, a discount specialist. “We are heading for another crisis,” it said.
Other experts play down the issue. The head of Friesland-Campina in Germany, Markus Brettschneider, says the company is well-prepared for a dent in prices. The company has adjusted its business to follow the trend toward pre-packaged cheeses and has put a focus on strengthening upmarket brands.
Nothing is certain, however. The quota that had limited the amount of milk produced in the European Union will be abolished in the spring. Apparently many dairy farmers are speculating that this will allow them to produce even more milk and sell much of it on the global market.
That is not completely without foundation. “The demand for German drinking milk in China is continuing to rise,” said Mr. Börgermann.
The result could be a stabilization in the price of milk.