Dairy farmer misses part of the price increase in the dairy market

While dairy prices have skyrocketed in 2021, dairy farmers see only a weak reflection of this on their milk bills, argues Dick van Selm, dairy farmer and chairman of Holland Dairy Producers (HDP). The prices of butter and skimmed milk powder rose last year by an average of 67%, the farmer's milk price by only 11%, he calculates. While costs rose sharply. Van Selm believes that dairy could be improved.

The price quotation of 100 kilos of butter rose from €340,00 in January 2021 to €575,00 in December of that year, the price of skimmed milk powder rose from €224,00 to €328,00 in the same period. As a result, the price of these two products rose by an average of 2021% in 67. The farmer's milk price rose from €35,00 to almost €45,00 per 100 kilos at the end of the year. The milk price for the whole of 2021 is on average 38,00% higher than in 100 at approximately €11 per 2020 kilos.

Barely noticeable in the wallet
The above means that the dairy farmer hardly notices any of the price increase in the market in his wallet, because the costs on the livestock farm have risen equally or faster. It is currently more profitable to make and sell bulk products such as butter and milk powder than all kinds of added value products such as specialty cheeses, protein drinks, baby food or desserts. That is of course strange: does the dairy industry have no control over costs or selling prices?

The dairy industry is quick to declare that in the event of sudden price increases for butter and powder, it will take some time before the price increase can also be implemented in contracts and deliveries for other products. And that the industry also has to deal with sharply rising (energy) costs. Journalists and writers in trade journals would expect those claims to be critically examined.

Butter and skimmed milk powder lay the foundation
What about the dairy market? Butter and skimmed milk powder are essential for the pricing of raw milk. These are the basic products of dairy processing: if the farm's milk cannot be put to value in other products, the milk is processed into butter (milk fat) and skimmed milk powder (protein and lactose). If dairy finds it difficult to sell, more butter and powder is produced and prices are under pressure. If the sale of dairy products becomes easier(er) or the supply of milk is tighter, less butter and powder will be produced and prices will rise. In other words: from the selling prices of butter and powder you can derive a price for the farm's milk that reflects the minimum value, as it were. By making more value-added products (and we do that in abundance in the Netherlands), the final farmer's milk price is normally higher, provided the dairy industry and chain stores keep costs under control.

In 2021, the dairy industry was unable to translate the large price increases for butter and powder into the price of other dairy products. Trade and chain stores have focused on maintaining their own returns and curbing inflation.

Rohstoffwert as farmers' minimum price
There is a German institution that has developed a model that calculates the farmer's milk price from the current commercial value of butter and powder in Western Europe. The Institut für Ernährungswirtschaft (IFE) publishes the Kieler Rohstoffwert monthly based on the quotations for butter and powder. You could say: the current farmer's minimum milk price.

If you compare the Kieler Rohstoffwert to the actual
average milk price paid by dairy companies, you can see exactly how much added value the industry, trade and retail realize compared to dairy farmers. You do that
for 2021, you come to the disconcerting conclusion that the farmer's milk price in the past year was on average almost €3,00 per 100 kilos lower than the price that could have been achieved if the dairy industry made it (not branded products, but) butter and powder. had made for the daily bulk market!

Time needed and extra costs industry
According to the dairy industry, the reasons for this are:

• Slower pass-through of prices in other parts of the dairy range. There is of course something in it, you cannot raise the sales price of the buyer overnight, certainly not if you have no contract agreements about this. We have calculated the effect of a delay of two to three months in selling prices. This indeed has a dampening effect on strong price rises (also on sharp falls, by the way). Converted in the farmer's milk price last year, this damping effect amounted to approximately €2,50 per 100 kilos. So with this price-damping slowdown, the dairy industry still scores on average almost €2021 below the Kieler raw material value over 0,50.
• Higher (energy) costs. These are updated each time in the calculation by Kiel on the basis of actual cost developments in German industry and would therefore have no impact on the calculated difference between factory price and Kieler raw material value.

Now it could be that the Dutch conditions differ from the German costs in terms of costs and that Kiel does not pass on cost increases quickly enough. Assuming that half of the Dutch cost increases are not passed on in Kiel, this would have an effect on the raw material value of approximately €0,50 per 100 kg.
So even if you take both effects into account, the payout price of the Dutch dairy industry for 2021 is almost equal to the Kieler raw material value.

€2,50 above raw material value this year?
The hard conclusion is that the added value of products last year yielded the dairy farmer at most the same as the sale of butter and powder in bulk. Now 2021 is a special year due to the sharp price increases. If the dairy industry's reasoning about the price slowdown is correct, then dairy farmers will
catch-up effect. We are curious whether the milk price this year moves €2,50 per 100 kilos above the Kieler raw material value!
If you look back over a longer period of, for example, ten years, it appears that the dairy industry has paid out a varying surcharge of €0,50 to €3,00 above the Kieler raw material value. Then the dairy industry succeeded in selling value-added products with more value. Over the past five years we have seen that this added value for the dairy farmer has decreased to an average of €1,00. That is a limited added value above the raw material value. Especially when you consider
that the Dutch dairy farmer produces the very best milk in the world, while the dairy industry, trade and chain stores derive added value that very little exceeds the standard quality for bulk products such as butter and powder.

To structurally €4 to €5 above Kiel
Holland Dairy Producers (HDP) has been insisting for a number of years that its milk buyer Vreugdenhil Dairy Foods makes a greater return on raw milk and shares it with its loyal suppliers. In the past year, the added value for added value products has evaporated. The aim of the dairy farmer and the dairy industry must be aimed at achieving added value from the sale of dairy products that are structurally above the market value of the basic products.
butter and powder. The milk price should structurally be €4,00 to €5,00 above the Kieler Rohstoffwert. This is necessary for the Dutch dairy sector to be able to make the investments to produce sustainably and deliver distinctive quality. In addition, just like the other links in the chain, dairy farmers are entitled to a real return on their contribution to the food supply. A payment system for farmers that is transparent about the added value realized in the dairy market is necessary in order to hold the other links in the dairy chain accountable for their responsibility for sound pricing.

HDP is an association of dairy farmers who supply the milk to Vreugdenhil Dairy Foods. HDP is working on a milk price system for dairy farmers in which the added value from dairy production and sales on the market is transparently visible and paid.

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