In 2006, German milk producers supplied 1.9 % less milk to German dairies than in the previous year. At 27.14 million tonnes, the total quantity of milk was the lowest since 2002. The 0.5 % quota increase on 1st April 2006 did nothing to stimulate milk production.

The reasons for the decline in milk deliveries lie primarily in the great reduction in dairy herd levels. In November 2006 there were 4.03 million. dairy cows in Germany, which was 3.2 % fewer than in the previous year. This reduction in herd level was not fully compensated for by the increase in milk production per cow. The reduction in the dairy cow herd was encouraged by attractive export opportunities for breeding heifers. In addition, milk production was depressed by unfavourable meteorological conditions in the spring and summer of 2006. A further factor that is contributing to a reduction in milk production is the increasing spread of biogas plants, which is leading to an increase in lease prices and the cost of roughage feed.

In the first quarter of 2007, German milk producers have sharply increased deliveries to dairies in order to take advantage of remaining opportunities to use up quotas. In this period, 4.3 % more milk was supplied than in the same period of the previous year, although the fat content of the milk tended to be lower. In this way, the milk quota for the quota year 2006/07 was almost completely used up.

Low milk prices in 2006 – changing trend for 2007

For the fifth time in a row, in 2006 milk prices in Germany fell. As can be seen from the ZMP [Central Market and Price Reporting Bureau] milk price comparison, on average milk producers received a farm gate price of 28.6 cents per kilogramme of milk with 4.2 % fat and 3.4 % protein including all bonuses and deductions; this was 0.3 cents less than in 2005. At a standardised fat content level of 3.7 %, the value was 27.4 cents. This represents a trough for milk prices, at least for the time being. Higher milk prices are expected once again in 2007.

Fewer milk products exported

In 2006, a higher proportion of milk produced in the EU was once again consumed within the internal market. This meant that fewer milk products remained for export to the world market. A further contribution to this trend was made by the low level of milk supply in the EU. At the same time, the exchange of goods within the Community of 25 increased. Even when the export to non-EU countries declines, trends in the world market have a significant influence on the price level within the EU. This was particularly apparent in the first two quarters of 2007, when the prices on the world market rose massively within a few months, elevating the internal price level at the same time.

Stable consumer milk market

Sales revenues in the drinking milk segment for 2006 turned out to be stable. In 2006, slightly more fresh milk was packaged for household consumption than in the previous year. Consumption in 2006 seems to have risen through the influence of the hot summer weather, especially in July. Semi-skimmed milk is becoming ever more popular, while full fat milk is losing further market share. Wholesale dairy prices for fresh milk have improved slightly since mid-2006. However, these price increases were absorbed by higher costs, particularly for energy and logistics, and increased packaging requirements.

In mid-2007, a breakthrough was achieved in wholesale dairy prices. Price increases of around 15 percent were successfully imposed on the retail trade. It seems that the key arguments in the price negotiations were increased takings for butter and skimmed milk powder. These improvements in receipts are expected to reach producers in the second half of the year.

A new trend for butter

A new trend began in the German butter market as early as autumn 2006; in spring 2006, the butter market was still regarded as weak. In Germany, too, recourse was taken once more to intervention. Almost 4,000 tonnes were delivered to the intervention centres. In the EU as a whole, as much as 60,000 tonnes of butter (approx.) was sold to the intervention centres. This was the first time since the beginning of the agricultural policy reform that the limit within which butter is sold according to the fixed price process was exceeded. From autumn 2006, the supply of butter available on the market became scarce. Butter from the intervention stocks was resold in increased amounts, leading to a reduction in stock of 60,000 tonnes. For the first time since the implementation of the agricultural reform, butter prices displayed their accustomed seasonal rise in autumn; this had not occurred in the two previous years. In spite of this price increase, lower butter prices were achieved on average in 2006 compared to the previous year. The price recorded in Hanover was an average of 20 cents per kilo below the level of the previous year. If all other sales had remained unchanged, this would have led to a drop of around one cent in the milk price.

In the first two quarters of 2007, the fixed trends in the butter market continued and strengthened. In June 2007, market prices rose clearly above the intervention price, and for the first time since the initiation of joint market regulation in 1968, the butter stocks were completely used up.

A very strong trend for skimmed milk powder

In 2006, the production of skimmed milk powder in Germany reached a low. The causes of the decline in production were the reduced supply of milk and the increased quantities of milk that were required due to the expansion of cheese production. During the course of 2006, the European Commission completely withdrew market support for milk protein. As early as June 2006, export payments were reduced to zero. During the remainder of 2006, the subsidy for the manufacture of casein and for the enrichment of skimmed milk powder in powdered baby milk was reduced to zero.

Continued growth in the cheese market

In terms of both production and consumption, the cheese market continued to grow in 2006, so continuing the trend of the previous year. In Germany, production increased faster than consumption, although per capita consumption reached an estimated new high of 22.4 kg. Much of the additional production was sold abroad. In 2006, Germany succeeded in exporting more to non-EU countries, and in particular more to Russia. In this respect, growth of 30 % was recorded. Deliveries to other EU countries also continued to increase in 2006. Within Germany, the trend towards cheese from supermarket shelves continued to be strong. Sales of sliced cheese were encouraged by an increase in the variety of products on offer as well as by an adequate slicing capacity.

Despite an increase in sales, for large parts of the year the cheese market was well-supplied. This meant that prices for various cheese items were not maintained at the level of the previous year. Cheese exploitation was supported, however, by rising prices for the by-product whey, particularly in the final months of 2006.

Rising prices in 2007

Milk prices in 2006 hardly reacted to the reduced subsidy level. However, because of reduced sales for butter and milk fat, slightly weaker prices in part for cheese, and increasing costs for energy, logistics and packaging, they did not quite maintain the level of the previous year. However, in the autumn of 2006, a change began that translated to almost explosive price rise trends for skimmed milk powder and subsequently also butter in the spring of 2007. The levels of exploitation in the various sectors of the market are therefore drifting apart to a considerable extent. Since June 2007, prices for drinking milk have risen significantly. Cheese prices, which remained the most sluggish during the first half of the year, should also move upwards in the remainder of 2007. All this makes rising milk prices for 2007 likely, with increases greater than the reductions of the last two calendar years. The improvement of the market situation with increased sales prices to the European groceries retail sector was actually reported on radio and television.

Retail price trends - Consumer prices
Milk and milk products	Unit	2004 (€)	2005 (€)		2006 in €
Whole milk, non-returnable packaging	1 l	0.57	0.57		0.58
Whole milk, returnable bottle	1 l	0.82	0.83		0.82
Long-life milk, 1.5% fat	1 l	0.49	0.49		0.49
Long-life milk, 3,5 % fat, package	1 l	0.56	0.56		0.56
German proprietary butter	250 g	0.86	0.80		0.77
Natural yoghurt, 3.5% fat	150 g	0.15	0.14		0.15
Quark, 40 %	250 g	0.43	0.41		0.39
Quark, low-fat	500 g	0.57	0.52		0.51
Cream, 30% fat	0,2 l	0.40	0.36		0.36
Evaporated milk, 7,5 % Fett, package	0,340 l	0.39	0.39		0.39
Emmentaler, Service	1 kg	7.51	7.43		7.48
Emmentaler, piece SB	1 kg	4.93	4.93		5.01
Gouda young, Service	1 kg	5.16	5.11		5.08
Gouda young, piece, SB	1 kg	4.34	4.21		4.14
Gouda young, slice, SB	1 kg	4.04	4.06		4.16
Feta nature, SB	1 kg	4.15	4.10		4.29
soft cheese, nature	1 kg	6.00	6.05		6.32
Source: Central Market & Price Reports Office, Central Marketing Association of the German Agricultural Industry