As announced in the last issue of the EMB Newsletter, here follows another extract from the EMB’s recently published brochure on co-operatives in the dairy sector. If you are interested you can acquire the full version of the brochure on co-operatives in German, English and French from the EMB.

Co-operative dairies, a curse or a blessing?? Risks and opportunities of the co-operative system for German milk producers

HANS FOLDENAUER

Co-operatives are an extremely old tradition in Germany, first mentioned way back in the Middle Ages. There are currently more than 5,400 co-operatives in Germany, roughly half of which operate in the agricultural sector. 70% of the milk produced in Germany is processed and marketed by co-operative dairies.

However, since the second half of the last century there has been an enormous structural change, especially in the dairy sector. Whereas in 1950 there were still 3,400 dairies predominantly organised as co-operatives in Germany, there are now fewer than a hundred. And the concentration process continues apace. Recent years have seen the development of mega co-operatives. At present the largest German dairy company is DMK GmbH, an amalgamation of Nordmilch eG, Humana Milchunion eG and Bad Bibra eG, with 10,500 dairy farmers producing 6.8 billion kilos of milk. The German dairy industry’s plan is to be in a better bargaining position with the retailers by creating increasingly large corporate structures.

This growth, however, is at the expense of the milk producers, who have less and less influence on the management of “their” dairy. Given the complexity of correlations, an increasing global expansion of markets, often the shareholders cannot counter the management and Board’s line of reasoning. For instance, when the milk producers or their representatives oppose the management’s and the Board’s proposals, the representatives of these bodies threaten to resign or state that notice to quit is irrevocable and a subsequent return to the dairy is impossible.

A crucial problem of the co-operative form of organisation in the dairy market is the link between capital and milk. This set-up means on the one hand the milk producers furnishing the dairy with equity capital by subscribing shares, and on the other hand the duty to supply under the constitution obliging them to provide it with all their milk for processing. Unfortunately most of the management bodies and committees of the co-operative dairies regard their co-owners first and foremost as milk suppliers, and less as investors and employers. Hence the nature of the pricing in co-operative dairies (“upside down”) results in the milk producers just being paid what is left over.

More and more milk producers realise the necessity of reforming the dairy market. The milk producers need a market to sell raw milk upstream of the processing stage, without altering the basic financial resources of the dairies. This realisation calls for a step-by-step approach. The first step is to separate capital from milk. The capital investment must be remunerated with interest paid on the shares, not with the price paid to the producers for delivering their milk. At the same time an independent contract has to be signed to regulate the milk supply. This can be done with part volumes or the entire volume, with the timing not being related to the term of the capital investment.

The milk producer of the future has to decide: am I a producer or a processor? It will not be possible to be both, except in niche markets. When s/he realises this fact, the corporate structure of the dairies will play only a minor role. Milk goes to whoever markets it best, capital to whoever pays the best return. Then there can be a market for milk upstream of the dairy industry. Milk will be negotiated, not delivered. To do so the milk producers must pool their milk. For if they go it alone in dealing with the dairy, no cost-covering price can be achieved.

Hans Foldenauer is the spokesman of the German Dairy Farmers (BDM) Board.

Christian Schnier (EMB)